Eliminate Subsidized Health Insurance

This proposal — drafted as the "Health Insurance Tax Parity Act of 2026" — would fully repeal the federal tax exclusion for employer-sponsored health insurance (ESI), taxing employer-provided health coverage on the same basis as cash wages and other taxable compensation. Unlike the more commonly studied option of capping the exclusion, this is a complete repeal across the income tax, payroll taxes, and cafeteria-plan mechanisms.

Existing Policy

The current tax preference is not a single statute but a cluster of interlocking Internal Revenue Code provisions. Section 106 excludes the value of employer-provided accident and health coverage from an employee's gross income; Section 105 excludes most medical-care reimbursements; Sections 3121(a)(2) and 3306(b)(2) remove employer health payments from "wages" for Social Security, Medicare, and federal unemployment taxes; and Section 125 lets employees pay their share of premiums pre-tax through cafeteria plans. JCT treats the Section 106/105 income exclusions as a single tax expenditure, noting that under a normal income tax the value of employer-provided accident and health coverage would be included in the income of employees.

This is among the very largest tax expenditures in the federal budget. The Tax Policy Center reports the exclusion will cost the federal government an estimated $299 billion in income and payroll taxes in 2022, making it the single largest tax expenditure. The Bipartisan Policy Center notes it is currently the third largest expenditure in the sprawling federal tax code, behind only retirement tax advantages and reduced capital gains tax rates. The preference dates to wartime wage controls; the IRS first determined in 1943 that an employer's share of ESI premiums could be excluded from taxable income, later codifying this into law in 1954.

Proposed Changes

The bill repeals Section 106, conforms Section 105 so that employer-attributable medical reimbursements are included in income, strikes the FICA and FUTA wage exclusions, and removes accident-and-health coverage from the list of cafeteria-plan qualified benefits (preventing the benefit from simply re-routing into tax-free salary reduction). It leaves the employer's business-expense deduction under Section 162 intact, consistent with treating premiums like wages. The drafting is technically sound; the one residual uncertainty flagged in the bill notes — the exact subparagraph lettering in Sections 3121(a)(2) and 3306(b)(2) — is a codification detail rather than a substantive flaw.

Arguments For and Against

For: The exclusion is widely viewed as inefficient and regressive. It creates an incentive for employers to shift pay packages toward untaxable ESI benefits rather than taxable wages, leading to increasingly generous ESI benefits that boost demand for healthcare and put upward pressure on healthcare prices. Because it reduces taxable income, it is worth more to taxpayers in higher tax brackets than to those in lower brackets. Repeal would broaden the base, raise substantial revenue, equalize treatment between those with and without employer coverage, and dampen the open-ended subsidy to costly plans. A robust labor-economics literature finds that premium costs are largely shifted almost completely to worker wages, implying that over time much of the taxed premium value could re-emerge as higher cash wages.

Against: Full repeal would be highly disruptive. The Council of Insurance Agents & Brokers cites CBO that removing the tax exclusion will result in at least two million fewer people receiving health insurance through their employer; while some may purchase coverage on the individual market or enroll in Medicaid, at least one million people will remain uninsured, and adverse selection will increase as healthier workers forgo coverage. The BPC observes that a full repeal of the ESI exclusion would be disruptive to businesses, workers, and families; a limit on the exclusion mitigates these concerns. Wage offset is not guaranteed in the short run, so workers could face an immediate after-tax pay cut.

Constitutional Considerations

There are no serious constitutional obstacles. Including the value of employer-provided coverage in gross income is a straightforward exercise of Congress's taxing power under Article I and the Sixteenth Amendment, which authorizes taxation of incomes "from whatever source derived." Imposing income and payroll tax on in-kind compensation is well within precedent; repeal simply removes a statutory exclusion rather than creating a novel tax. The change is prospective (effective for years beginning after December 31, 2026), avoiding retroactivity concerns.

Fiscal Impact

The proposal is a substantial net tax increase that would reduce federal deficits. The Tax Policy Center estimates that repealing the exclusion would increase combined federal income and payroll tax revenues by $300 billion per year. The Tax Foundation puts the full ten-year cost of the exclusion at more than $5 trillion over the next decade due to reduced income and payroll tax revenue. Gross revenue gains would be partially offset by behavioral and program effects: JCT's "tax form behavior" assumption allows displaced taxpayers to claim premiums as an itemized medical deduction on Schedule A if the exclusion for employer-paid health insurance were repealed; higher ACA marketplace, Medicaid, and CHIP outlays would arise as workers drop coverage; and a larger taxable wage base raises future Social Security benefit obligations. CBO's capped-exclusion options illustrate the offset structure — for example, one alternative would decrease cumulative federal deficits by $500 billion by 2032, increasing revenues by $514 billion and outlays by $14 billion. Netting gross collections of roughly $300–$450 billion annually (rising with premium growth) against outlay offsets and benefit accruals, the most defensible estimate is net deficit reduction of approximately $3,500 billion over ten years. This is a wide-uncertainty figure given that full repeal is modeled less often than capping.

Equity Impact

The distributional pattern is nuanced. In absolute dollars, the burden rises with income because the value of the tax exclusion is greater for workers with higher income, partly because those workers face higher tax rates, are more likely to be offered coverage, are typically offered more generous plans with higher premiums, and are more likely to have FSAs and HSAs. Lower-income households are less affected because households without employment-based coverage, which tend to have lower income, would not be directly affected. However, measured as a share of income, the TPC finds full repeal would increase taxes more for taxpayers in the top income quintiles but reduce after-tax income the most in percentage terms for the middle and fourth quintiles. The estimates below show average annual net change per household (negative = higher net tax / lower net income). Note that absolute burdens flatten near the very top because premium values do not scale with income and the payroll-tax portion applies only up to the Social Security wage base. These figures assume no immediate wage offset; to the extent employers convert lost premiums to taxable wages over time, net household losses would moderate.