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Taxing Health Insurance: Effects on Employees in Firms with Older Workforces

Congress continues to consider whether to tax employer-paid health insurance benefits to raise revenues and reduce “unnecessary” health care utilization. One argument against such a tax is that it would disproportionately affect employee groups with concentrations of older workers because those groups have a higher actuarial cost for any given level of health coverage. This study estimates tax liabilities for taxpayers in young versus older employee groups with the same prototypical health coverage in 36 geographic areas. Liabilities are computed for the two most discussed policy options: taxing the entire health premium, and taxing any premium above a “cap.” If all health benefits were taxed, 1987 tax liability differences due solely to average age of employment group would be up to $613.20 for families in the z8% marginal tax bracket and $328.50 in the I 5% bracket. If health benefits were taxed above a cap of $3,600 for families, tax liability differences would be as high as $600.04 for families in the 28% bracket and $321.45 in the i5% bracket. Therefore, both policy options would result in substantially higher tax liability for taxpayers employed in older-than-average employment groups. Policy implications and potential behavioral responses to taxation are discussed.