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. 2002 Spring;23(3):131–159.

Figure 5. Distribution of Income Tax Loss from Deduction and Exclusions for Health Expenditures: United States, Fiscal Year 2000.

Figure 5

  • Various health care-related deductions and exclusions—covering the exclusion of employer-paid medical insurance premiums and medical care from individuals' taxable incomes—account for 14 percent of these tax expenditures. The largest health category of tax expenditure is employer-paid premiums spent for employee and dependent health insurance coverage (Figure 5). In fiscal year 2000, estimated forgone Federal tax revenue from this source reached $77 billion.
  • When estimates of forgone tax revenue are discussed in a policy context, they can be misinterpreted. The most common misinterpretation is that repealing specific provisions of the tax law would result in a commensurate increase in Federal revenues, giving rise to the notion that repeal of these provisions could fund health coverage for the uninsured. Tax law provisions provide incentives that are designed to alter economic behavior of individuals and businesses, but these provisions also produce other effects in the health care system and beyond (Executive Office of the President, 2001).
  • When employers allocate part of employee compensation to the purchase of health insurance premiums for their workers, part of total compensation is transferred from taxable to tax-exempt income of workers.
  • Employers also provide an additional benefit to workers by lowering the average cost of health insurance by creating larger pools of enrollees to share risk.
  • By increasing affordability of health insurance, Federal social and economic goals of protection from catastrophic health costs, increased access to health care, and improved health and productivity of workers are assumed to be advanced.
  • Among other effects, repeal of these provisions could increase the cost of health insurance, reduce after-tax compensation, swell the roles of the uninsured and the publicly insured, and reduce health status and productivity.