Health Care Tax Benefits Give High-Income Households a Boost

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By Colleen Murphy

Aug. 22 — About 85 percent of people in the top 20 percent of income get a tax cut because of health care-related tax spending, according to new data from the Urban-Brookings Tax Policy Center.

AVERAGE PRE-TAX INCOME

• Lowest quintile: $13,910

• Second quintile: $34,050

• Middle quintile: $63,040

• Fourth quintile: $107,980

• Top quintile: $328,790

Source: Tax Policy Center 2016 modeling

That contrasts with 9 percent of the lowest-income households, according to the data, released in an Aug. 22 blog. The reason? Low-income taxpayers are less likely to work at companies that provide employer-sponsored insurance and are less likely to have money to put into a health savings account, John Iselin, a research assistant at the center, told Bloomberg BNA.

But for those in the top 20 percent of income, “there are these options available to you that wouldn't be available to you otherwise,” Iselin said Aug. 22. The top quintile earn $328,790 on average before tax, according the center's modeling for 2016.

The federal government spent $260 billion on health care-related tax expenditures in 2015, according to the center. The largest tax preference is the exclusion from taxable income of employer contributions for medical insurance premiums. Other provisions include contributions to tax-preferred health accounts and self-employment health insurance premiums.

About half of households receive some benefit from health-related tax spending, according to the data.

Digging Deeper

Because they aren't tax credits, but exemptions or deductions meant to trim an individual's tax burden, they don't benefit most low-income taxpayers, Iselin said.

Only about 12 percent of taxpayers in the bottom quintile have any income tax liability, according to data from the center. And because the income tax is progressive, the exemption is more valuable for taxpayers with higher incomes, because their tax rate is also higher, he said (134 DTR G-1, 7/13/16).

Middle-income households receive tax savings equal to 1.8 percent of their after-tax income, compared with 0.1 percent for the lowest-income households, according to the data. Middle-income households earn an average of $63,040 before taxes, according to the 2016 modeling. Those in the lowest quintile earn an average of $13,910 before taxes, the data says.

Some possible solutions include changing the exemption to a refundable or non-refundable credit, capping exemptions or eliminating the policy and replacing it with a “non-tax solution,” Iselin said. Still, there are “a lot of questions” about what plan would be best, he said.

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

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