By: Dr. Lynn Reaser
As the President and Congress struggle to avoid the “Fiscal Cliff”, the challenge of reducing the federal deficit over time persists. While raising marginal tax rates could adversely affect incentives to work, save, and invest, support is emerging to broaden the tax base and reform the tax code.
There are many distortions and inequities in our tax system today. One tax break that should be considered involves that subsidizing employer-sponsored health insurance. This represents the largest tax expenditure, amounting to about $184 billion in 2012.
Originally enacted to circumvent World War II wage controls, the tax break has contributed to the escalation in health costs. It also is unfair under a progressive income tax code, giving a larger effective subsidy to those in higher tax brackets. Capping the deduction and phasing it in over time would be important to prevent undue disruption to the health care system.
Congress should enact a broad-based plan to cap a variety of tax subsidies, but the health care cost break should be a component.