The huge health-care subsidy everyone is ignoring

October 15, 2013

The political right has paralyzed government over the implementation of the Affordable Care Act, on the grounds that the ACA represents an unacceptable government intrusion into what today is the province of private markets. But the premise is fundamentally untrue.

It's all about the health-care benjamins. (Romeo Ranoco of Reuters)
It's all about the health-care Benjamins. (Romeo Ranoco of Reuters)

Government’s hand has long shaped and subsidized health-care markets, for example, in Medicare and Medicaid (which dominate how medical care is organized and delivered in America, even for care that falls outside their reach), or the requirement that hospitals treat urgent care needs of indigents.

But perhaps the most consequential subsidy is rarely mentioned or even noticed: Government for decades has directly subsidized individuals’ costs of employer-based health care, to the tune of roughly $250 billion every year – sums far greater than the annual costs of the subsidized insurance coverage provisions of the Affordable Care Act.

That fact makes the ongoing debate positively perverse. What we are witnessing today are individuals who already receive government health-care handouts attempting to prevent others from obtaining similar (but smaller in aggregate amount) health-care subsidies, as well. And as a group, today’s recipients of government health-care subsidies are better off to begin with than are those they wish to exclude.

Today’s direct government subsidies for health care are easy for the political right to ignore because those handouts are not delivered through messy health exchanges or government checks, but rather through the income tax.

The vast majority of Americans get their health care through employer plans, which of course will continue under the Affordable Care Act. When your employer pays your salary, the employer deducts the cost of your compensation as a business expense in figuring its own tax bill. The same applies to health care that your employer buys for you – the insurance premiums or out-of-pocket expenses the employer pays are deductible expenses, because those costs, in fact, are simply more compensation paid for your services.

But – and here is the magic – while cash salary or bonuses paid to you are your taxable income, the tax code expressly allows you to ignore the value of the health-care costs that your employer pays on your behalf in calculating your taxable income. If your health-care insurance costs your employer $10,000 each year, you are saving up to $4,000 or so on your income tax bill, plus saving payroll tax costs on that $10,000, as well. Conversely, if your employer paid you the $10,000 in my example in cash, and told you to go buy insurance if you wanted it, you would be hit with both income and payroll tax bills on that amount.

Health care is the only significant form of employee compensation that can be delivered tax-free to the employee, while being treated as a business expense by the employer. For example, bonuses paid in the form of cars, diamonds, free housing (with very narrow exceptions), or, for that matter, chickens, all would be taxable income to you.

The exclusion of employer-paid health-care costs is a deliberate exception to the general rule that any form of compensation must be included in your income. This is not a new government subsidy program – it has been the law for many decades. But it is in fact a subsidy, not an instance of the government letting you keep what’s yours. As anyone who has compared job offers knows, health care is just another part of your total compensation package

So today, 140 million Americans (including members of Congress) directly receive government subsidies when they get health-care coverage through their employers. The Affordable Care Act extends government health-care subsidies to millions of other Americans, but for administrative reasons delivers the subsidy through a different mechanism. But so what? Why is the first subsidy somehow lost in a fog of flag waving and free enterprise talk, and the second the sure sign of galloping socialism?

It is true that some Republican leaders in the past have called for the elimination of this distortive and expensive subsidy, but that is not what is going on today. No member of Congress who advocates the torpedoing of the Affordable Care Act is agitating to strip federal government subsidies from Americans with employer-provided health care. That would be the wrong result, because it would deprive millions of health care that they simply cannot obtain in private markets, but at least it could be presented as eliminating subsidies for all.

The plain fact is that those who have paralyzed government over the Affordable Care Act today feed at the trough of government health-care subsidies, while seeking to exclude others from sharing the bounty. This is simple selfishness in action.  If you claim to stand on principle in your demands to destroy the Affordable Care Act, first give back the $250 billion you’ve been taking every year in government help.

Edward D. Kleinbard is a law professor at the University of Southern California Gould School of Law, and former chief of staff of the U.S. Congress’s Joint Committee on Taxation.

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Neil Irwin | October 15, 2013