One of the largest tax expenditures in the code is the unlimited exclusion for employer-sponsored health benefits. A new proposal from Senator Orrin Hatch (R-UT), Senator Richard Burr (R-NC) and House Energy and Commerce Committee Chairman Fred Upton (R-MI) would replace the Affordable Care Act (ACA) and related laws with a comprehensive set of reforms that would include, for the first time, an overall individual limit on this exclusion. This limit, which would replace the ACA’s 40-percent excise tax on high-cost plans (also known as the “Cadillac Tax”), would enable consumers to receive $12,000 of health coverage for individuals ($30,000 for families) free of tax. Any premiums over these amounts, however, would become subject to personal income tax. The thresholds would be adjusted annually for inflation (at a rate of CPI plus 1 percent).
The limit proposed by Hatch, Burr and Upton is similar to a proposal from the Bipartisan Policy Center. In 2013, the leaders of BPC’s Health Care Cost Containment Initiative proposed to establish a limit on the exclusion for employer-sponsored health benefits that would begin at the 80th percentile of individual and family premiums. The proposed limit would have been indexed to per-capita GDP growth plus 0.5 percent until 2023, and per-capita GDP growth thereafter.
The Hatch, Burr and Upton proposal to limit the exclusion is encouraging. It would be a fairer and more progressive approach than the current-law Cadillac Tax.