Employer-Sponsored Health Insurance Premiums: ACA Tax Credits

Key Findings

• Policymakers are contemplating methods to increase the enhancements made to Reasonably priced Care Act premium taxA tax is a compulsory fee or cost collected by native, state, and nationwide governments from people or companies to cowl the prices of basic authorities companies, items, and actions. credit (PTCs) that expire on the finish of the 12 months, which might value $350 billion over the subsequent decade.
• Any growth of the credit must be offset by decreasing different healthcare subsidies or preferences within the tax code, the most important of which is the exclusion for employer-sponsored medical health insurance (ESI) premiums, estimated to value greater than $5 trillion over the subsequent decade resulting from decreased earnings and payroll taxA payroll tax is a tax paid on the wages and salaries of staff to finance social insurance coverage packages like Social Safety, Medicare, and unemployment insurance coverage. Payroll taxes are social insurance coverage taxes that comprise 24.8 p.c of mixed federal, state, and native authorities income, the second largest supply of that mixed tax income. income.
• We analyze 4 choices to restrict the earnings tax exclusion for ESI on the 80^th and 90^th percentiles of premiums, discovering these choices would increase substantial quantities of income—as much as $389 billion over the subsequent decade—with the impacts falling totally on the highest 10 p.c of earners.

Introduction

Policymakers are contemplating methods to increase the enhancements made to Reasonably priced Care Act premium tax credit (PTCs) that expire on the finish of the 12 months, which have been initially offered on a short lived foundation as a part of the American Rescue Plan Act of 2021 and later prolonged as a part of the InflationInflation is when the final value of products and companies will increase throughout the economic system, decreasing the buying energy of a forex and the worth of sure belongings. The identical paycheck covers much less items, companies, and payments. It is typically known as a “hidden tax,” because it leaves taxpayers much less well-off resulting from greater prices and “bracket creep,” whereas growing the federal government’s spendin Discount Act of 2022.[1] The PTC enhancements scale back the utmost quantity eligible enrollees are required to contribute towards medical health insurance premiums for medical health insurance bought by the Reasonably priced Care Act exchanges and lengthen eligibility to individuals whose earnings is above 400 p.c of the poverty degree.

The Congressional Finances Workplace (CBO) just lately estimated that completely extending the PTC enhancements would enhance the price range deficit by $350 billion over the 2026-2035 interval (relative to a baseline that features adjustments made beneath the One Huge Lovely Invoice Act, or OBBBA).[2] The CBO additionally estimated 3.8 million extra individuals would have medical health insurance in 2035 due to the extension.

Costing about $1 trillion over the subsequent decade, PTCs are the costliest tax credit score within the tax code, together with outlay results that outcome from refundability.[3] Controlling the price of these and different healthcare subsidies, that are a big and rising share of the price range and rising quicker than the general economic system, is a crucial a part of reining within the federal authorities’s unsustainable fiscal trajectory.[4]

Reasonably than decreasing healthcare prices, these subsidies have typically contributed to greater prices by boosting demand with out addressing provide constraints and have shifted the burden of the price from shoppers to taxpayers.[5] Rising healthcare prices are anticipated to extend the price of insurance coverage premiums by greater than 9 p.c in 2026.[6] Any growth of PTCs must be offset by decreasing different healthcare subsidies or preferences within the tax code.

Whereas the tax code incorporates a number of preferences for healthcare along with the PTCs, together with well being financial savings accounts and the deductibility of medical bills, far and away the most important is the exclusion for employer-sponsored medical health insurance (ESI) premiums, which can scale back earnings tax income by $3.9 trillion over the subsequent decade (2025-2034) in keeping with the Treasury Division’s tax expenditureTax expenditures are departures from a “regular” tax code that decrease the tax burden of people or companies by an exemption, deduction, credit score, or preferential price. Nevertheless, defining which tax expenditures grant particular advantages to sure teams of individuals or kinds of financial exercise is just not at all times easy. estimates.[7] As a result of the exclusion additionally reduces payroll taxes that might in any other case apply to ESI, the whole lack of federal tax income is estimated at $5.9 trillion over the subsequent decade.

The exclusion for ESI has been in place since World Warfare II, creating an incentive for employers to shift pay packages towards untaxable ESI advantages slightly than taxable wages and salaries, resulting in more and more beneficiant ESI advantages that increase demand for healthcare and put upward strain on healthcare costs.[8] Over the past 25 years, progress in ESI advantages has outstripped progress in employees’ wages and inflation, with common annual premiums for ESI reaching $8,951 for single protection and $25,572 for household protection in 2024, in keeping with the most recent survey by KFF.[9] The exclusion distorts the labor market and the healthcare market, because it favors pricey insurance coverage protection tied to employment slightly than protection that travels from one job to the subsequent or direct funds to healthcare suppliers.[10]

Absolutely eliminating the exclusion for ESI would take away these distortions however lead to a serious tax enhance on employees. A extra incremental reform that caps the exclusion would cut back distortions on the margin, limiting the most costly healthcare plans, and nonetheless increase substantial quantities of income. Within the evaluation that follows, we look at 4 choices to restrict the earnings tax exclusion (leaving the payroll tax exclusion in place) for ESI on the 80^th and 90^th percentiles of premiums, estimating income and distributional impacts over the subsequent decade.

Federal Income Impacts of Limiting the ESI Exclusion

We modeled the next 4 choices for limiting the earnings tax exclusion for ESI starting in 2026, relative to present regulation and accounting for the OBBBA:

1. Restrict the earnings tax exclusion for ESI above the 80^th percentile of premiums beginning in 2026 (estimated to be $14,329 for particular person protection and $36,929 for household protection in 2026 and rising thereafter to stay on the 80^th percentile of premiums)[11]
2. Restrict the earnings tax exclusion for ESI above the 80^th percentile of premiums in 2026, thereafter indexing the 2026 nominal ESI cap to inflation (as measured by core PCE)
3. Restrict the earnings tax exclusion for ESI above the 90^th percentile of premiums beginning in 2026 (estimated to be $18,752 for particular person protection and $49,201 for household protection in 2026 and rising thereafter to stay on the 90^th percentile of premiums)
4. Restrict the earnings tax exclusion for ESI above the 90^th percentile of premiums in 2026, thereafter indexing the 2026 nominal ESI cap to inflation (as measured by core PCE)

We estimate a spread of federal income results for these proposals (see Desk 1).[12] Choice 3 would increase the least income over the price range window, from 2026 to 2035: $138 billion on a standard foundation, or $135 billion on a dynamic foundation (i.e., accounting for financial impacts arising from a rise in marginal tax charges on labor earnings).[13]

Choice 2 would increase probably the most income over the price range window: $389 billion on a standard foundation, or $371 billion on a dynamic foundation. Choices 2 and 4 increase extra income within the years after 2026, relative to Choices 1 and three, as a result of the ESI cap that grows with inflation applies to a rising share of healthcare plans over time.

Desk 1. Income Results of Limiting the Tax Exclusion for ESI ($ Billions) 

Supply: Tax Basis Basic Equilibrium Mannequin, September 2025 

Distributional Impacts of Limiting the ESI Exclusion

Distributionally, we estimate that Choice 1 would cut back after-tax earnings by 0.2 p.c total in 2026 and in 2035, conventionally measured, with basically all the affect falling on the highest 10 p.c of earners. Accounting for the financial impacts doesn’t considerably change the distributional impacts. The opposite three coverage choices lead to comparable distributional impacts (see Desk 2).

Desk 2. Distributional Results of Limiting the Tax Exclusion for ESI (% Change in After-Tax Revenue, Conventionally Measured)

Be aware: Market earnings consists of adjusted gross earningsFor people, gross earnings is the whole of all earnings acquired from any supply earlier than taxes or deductions. It consists of wages, salaries, suggestions, curiosity, dividends, capital positive factors, rental earnings, alimony, pensions, and different types of earnings.
For companies, gross earnings (or gross revenue) is the sum of complete receipts or gross sales minus the price of items offered (COGS)—the direct prices of manufacturing items (AGI) plus 1) tax-exempt curiosity, 2) non-taxable Social Safety earnings, 3) the employer share of payroll taxes, 4) imputed company tax legal responsibility, 5) employer-sponsored medical health insurance and different fringe advantages, 6) taxpayers’ imputed contributions to defined-contribution pension plans. Market earnings ranges are adjusted for the variety of exemptions reported on every return to make tax items extra comparable. After-tax earnings is market earnings much less: particular person earnings taxA person earnings tax (or private earnings tax) is levied on the wages, salaries, investments, or different types of earnings a person or family earns. The U.S. imposes a progressive earnings tax the place charges enhance with earnings. The Federal Revenue Tax was established in 1913 with the ratification of the sixteenth Modification. Although barely 100 years outdated, particular person earnings taxes are the most important supply, company earnings taxA company earnings tax (CIT) is levied by federal and state governments on enterprise income. Many firms should not topic to the CIT as a result of they’re taxed as pass-through companies, with earnings reportable beneath the person earnings tax., payroll taxes, property and reward taxA present tax is a tax on the switch of property by a dwelling particular person, with out fee or a priceless change in return. The donor, not the recipient of the reward, is usually chargeable for the tax., customs duties, and excise taxes. The 2026 earnings break factors by percentile are: 20%-$17,735; 40%-$38,572; 60%-$73,905; 80%-$130,661; 90%-$188,849; 95%-$266,968; 99%-$611,194. Tax items with unfavorable market earnings and non-filers are excluded from the percentile teams however included within the totals.
Supply: Tax Basis Basic Equilibrium Mannequin, September 2025 

Conclusion

Bettering neutrality is a crucial aim of tax coverage, and limiting the exclusion for ESI would supply extra impartial therapy of main types of compensation, decreasing distortions within the labor market and healthcare market. Capping the exclusion on the 80^th or 90^th percentile of premiums, as proposed right here, would cut back distortions and lift substantial quantities of income, primarily impacting excessive earners with exceptionally beneficiant ESI advantages.

As a result of the proposals increase marginal tax charges on compensation, we discover small unfavorable impacts on GDP. Nevertheless, to the extent the proposals lead employers to shift towards different types of compensation, equivalent to money, which can be most popular by employees, the financial hurt could be decreased. To the extent the proposals scale back demand for healthcare and enhance effectivity within the healthcare market, they could scale back healthcare costs usually, broadly benefiting shoppers of healthcare (employer-sponsored or in any other case).

[1] Robert King and Benjamin Guggenheim, “Home Republicans Launch Invoice to Lengthen Well being Subsidies Previous Midterms,” Politico, Sep. 4, 2025, https://www.politico.com/news/2025/09/04/aca-enhanced-tax-credits-extension-00544565.

[2] Congressional Finances Workplace, “The Estimated Results of Enacting Chosen Well being Protection Insurance policies on the Federal Finances and on the Variety of Folks With Well being Insurance coverage,” Sep. 18, 2025, https://www.cbo.gov/system/files/2025-09/61734-Health.pdf.

[3] US Treasury Division, “Tax Expenditures Fiscal Yr 2026,” Nov. 27, 2024, https://home.treasury.gov/system/files/131/Tax-Expenditures-FY2026.pdf; Joint Committee on Taxation, “Estimates of Federal Tax Expenditures for Fiscal Years 2024-2028,” Dec. 11, 2024, https://www.jct.gov/publications/2024/jcx-48-24/.

[4] William McBride, Erica York, Alex Durante, and Garrett Watson, “The Unsustainable US Debt Course and Impacts of Potential Tax Adjustments, “ Tax Basis, Jan. 14, 2025, https://taxfoundation.org/analysis/all/federal/us-debt-budget-taxes-spending-social-security-medicare/; PTCs and different main healthcare packages are about 28 p.c of the federal price range this 12 months and projected to develop to greater than 30 p.c over the subsequent 10 years. Main healthcare packages are projected to develop about 5.6 p.c yearly over the subsequent decade, versus about 3.8 p.c progress for nominal GDP. See: Congressional Finances Workplace, “The Finances and Financial Outlook: 2025 to 2035,” Jan. 17, 2025, https://www.cbo.gov/publication/60870.

[5] Maria Polyakova and Stephen P. Ryan, “Subsidy Concentrating on with Market Energy,” NBER working paper 26367, Aug. 2021, https://www.nber.org/papers/w26367; Marika Cabral, Michael Geruso, and Neale Mahoney, “Do Bigger Well being Insurance coverage Subsidies Profit Sufferers or Producers? Proof from Medicare Benefit,” American Financial Overview 108:8 (August 2018), https://www.aeaweb.org/articles?id=10.1257/aer.20151362; Cynthia Cox, Jared Ortaliza, Emma Wagner, and Krutika Amin, “Well being Care Prices and Affordability,” KFF, Could 28, 2024, https://www.kff.org/health-costs/health-policy-101-health-care-costs-and-affordability/?entry=table-of-contents-introduction; Jared Ortaliza, Anna Wire, Matt McGrough, Justin Lo, and Cynthia Cox, “Inflation Discount Act Well being Insurance coverage Subsidies: What’s Their Influence and What Would Occur if They Expire?,” KFF, Jul. 26, 2024, https://www.kff.org/affordable-care-act/inflation-reduction-act-health-insurance-subsidies-what-is-their-impact-and-what-would-happen-if-they-expire/; Mark Pauly, Scott Harrington, and Adam Leive, “Sticker Shock in Particular person Insurance coverage beneath Well being Reform,” NBER working paper 20223, June 2014, https://www.nber.org/papers/w20223.

[6] Anna Wilde Mathews, “Well being Insurance coverage Prices for Companies to Rise by Most in 15 Years,” The Wall Avenue Journal, Sep. 10, 2025, https://www.wsj.com/health/healthcare/health-insurance-costs-rise-6cc1b934.

[7] In response to Treasury Division estimates, after the exclusion for ESI, the most important healthcare tax expenditure is the PTC, adopted by the deductibility of medical bills (costing $243 billion over the subsequent decade), well being financial savings accounts ($181 billion), the deductibility of charitable contributions to well being establishments ($153 billion), and the deductibility of self-employed medical insurance coverage premiums ($143 billion) amongst different smaller tax expenditures. As well as, nonprofit hospitals are exempt from company tax, which, though unaccounted for in official estimates, could scale back federal income by roughly $200 billion or extra over the subsequent decade. See: US Treasury Division, “Tax Expenditures Fiscal Yr 2026,” Nov. 27, 2024, https://home.treasury.gov/system/files/131/Tax-Expenditures-FY2026.pdf; Scott Hodge, “Reining in America’s $3.3 Trillion Tax-Exempt Financial system,” Jun. 18, 2024, https://taxfoundation.org/analysis/all/federal/501c3-nonprofit-organization-tax-exempt/; Joint Committee on Taxation, “Estimates of Federal Tax Expenditures for Fiscal Years 2024-2028,” Dec. 11, 2024, https://www.jct.gov/publications/2024/jcx-48-24/.

[8] Michael Cannon, “Tackling America’s Elementary Well being Care Drawback,” Cato Institute, July/August 2022, https://www.cato.org/policy-report/july/august-2022/tackling-americas-fundamental-health-care-problem; Congressional Finances Workplace, “Cut back Tax Subsidies for Employment-Primarily based Well being Insurance coverage,” Dec. 7, 2022, https://www.cbo.gov/budget-options/58627; David Powell, “The Distortionary Results of the Well being Insurance coverage Tax Exclusion,” American Journal of Well being Economics 5:4 (Fall 2019), https://www.journals.uchicago.edu/doi/10.1162/ajhe_a_00126.

[9] KFF, “2024 Employer Well being Advantages Survey,” Oct. 9, 2024, https://www.kff.org/health-costs/2024-employer-health-benefits-survey/.

[10] Well being financial savings accounts can now be used to pay charges for direct major care preparations, resulting from adjustments made as a part of OBBBA, and can be utilized to pay for different out-of-pocket healthcare bills, topic to annual contribution limits and different constraints. The tax code supplies different restricted preferences for sure kinds of out-of-pocket healthcare bills, equivalent to deductibility of medical bills above a sure threshold. See: David Kopans, Erin Sweeney, and Lindsey LePlae, “Paying for Direct Major Care Preparations with HSAs is Now Permitted – with Caveats,” DLA Piper, Aug. 6, 2025, https://www.dlapiper.com/en-us/insights/publications/2025/08/paying-for-direct-primary-care-arrangements-with-hsa;

Michael Cannon, “Tackling America’s Elementary Well being Care Drawback,” Cato Institute, July/August 2022, https://www.cato.org/policy-report/july/august-2022/tackling-americas-fundamental-health-care-problem.

[11] US Bureau of Labor Statistics (BLS), “Medical Care Premiums in america, March 2023,” https://www.bls.gov/ebs/factsheets/medical-care-premiums-in-the-united-states.htm; BLS, “Desk 3. Medical Plans: Share of Premiums Paid by Employer and Worker for Single Protection,” https://www.bls.gov/news.release/ebs2.t03.htm; BLS, “Desk 4. Medical Plans: Share of Premiums Paid by Employer and Worker for Household Protection,” https://www.bls.gov/information.launch/ebs2.t04.htm.

[12] For an outline of Tax Basis’s mannequin, see: Huaqun Li, Garrett Watson, and Erica York, “Overview of the Tax Basis’s Basic Equilibrium Mannequin,” Tax Basis, Mar. 5, 2025,  https://taxfoundation.org/analysis/all/federal/general-equilibrium-model/. We assume ESI advantages develop on the similar price as wages and salaries (as do the 80^th and 90^th percentile of premiums), which is a quicker progress price than the CBO initiatives for the core private consumption expenditures (PCE) value index, used to cap the ESI exclusion in Choices 2 and 4. We don’t assume employers shift pay packages towards taxable wages and salaries in response to the proposals, and thus would possibly understate extra payroll tax income that would outcome. Our mannequin doesn’t seize the micro-level heterogeneity of ESI advantages at every earnings degree, and thus would possibly understate the income results of capping the ESI exclusion. Our mannequin doesn’t seize tax avoidance conduct that’s specific to ESI and different untaxed fringe advantages. To the diploma that employers substitute different untaxed fringe advantages for ESI, our mannequin will overstate the income results of limiting the ESI exclusion. Moreover, our mannequin doesn’t explicitly seize the interplay results with PTCs, which can overstate the income results of limiting the ESI exclusion. On internet, these results could also be largely offsetting for income estimating functions. 

[13] All 4 coverage choices scale back GDP over the long term by a small quantity (lower than 0.05 p.c). We assume employees are detached between a greenback of money compensation and a greenback of ESI, which overstates the financial hurt to the extent employees choose money and employers accommodate this desire by growing money compensation as a share of complete compensation.

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