Tax Expenditures in the Health Sector
Tax expenditures are government revenue losses resulting from provisions in the tax code that allow an individual or business to reduce their tax liabilities by taking certain deductions, exemptions, exclusions, preferential rates, deferrals, or credits. Tax expenditures reduce the amount of revenue that would otherwise have been collected by the government, and thus have a similar effect on the federal budget as a spending program. They also can benefit recipients in much the same way as direct spending. Subsidyscope illuminates the budgetary costs of these programs; however, any use of these data for policy evaluation must weigh those costs against the benefits they provide. The costs of tax expenditures are estimated by two government entities: the US Department of the Treasury (Treasury), in the executive branch, and the nonpartisan staff of the Joint Committee on Taxation (JCT), a congressional committee. Each uses different methods and formats for calculating and presenting its estimates (see this Methodology page for more detail). Subsidyscope presents Treasury estimates below that are published by the Office of Management and Budget (OMB).
Table 1: Health Related Tax Expenditures for Individuals and Corporations, Fiscal Years 2009 and 2010 ($ millions)
|Tax Expenditure||FY 2009||FY 2010|
|Exclusion of employer contributions for medical insurance premiums and medical care||$144,412||$160,110|
|Deductibility of medical expenses||$8,760||$9,090|
|Self-employed medical insurance premiums||$4,870||$5,680|
|Deductibility of charitable contributions (health)||$4,150||$3,850|
|Exclusion of interest on hospital construction bonds||$2,690||$3,530|
|Credit for employee health insurance expenses of small business||*||$2,300|
|Medical Savings Accounts / Health Savings Accounts||$1,930||$1,790|
|Special Blue Cross/Blue Shield deduction||$760||$750|
|Tax credit for orphan drug research||$270||$470|
|Distributions from retirement plans for premiums for health and long-term care insurance||$260||$260|
|Refundable Premium Assistance Tax Credit||*||$0|
|Tax credit for health insurance purchased by certain displaced and retired individuals||$10||$0|
Source: Subsidyscope analysis of data from OMB. Budget of the U.S. Government. Fiscal year 2009 figures are from Analytical Perspectives, FY2011, p. 211; fiscal year 2010 figures are from Analytical Perspectives, FY2012, p. 243.
*This tax expenditure was not recorded in the FY2011 Analytical Perspectives.
Under current law, employer-paid health insurance premiums and other medical expenses (including long-term care) are not taxed as income to the employee. With an estimated revenue loss of $160.1 billion in fiscal year 2010 (as seen in Table 1), the Exclusion of employer contributions for medical insurance premiums and medical care dwarfs all other tax expenditures in the Health sector. Moreover, according to both Treasury and JCT estimates, it is the largest tax expenditure in the tax code (see Table 1 on Pew's Tax Expenditure Database Summary page showing the five largest tax expenditures).
- Summing tax expenditures often provides a reasonably good estimate for the total cost of groups of tax expenditures, though it does not capture potential interactions among tax expenditures or behavioral responses if any single one is changed or repealed. For more on summing tax expenditures and their interaction effects, see Burman, Leonard, Eric Toder and Christopher Geissler. "How Big Are Total Individual Income Tax Expenditures, and Who Benefits from Them?" The Urban Institute. Washington, DC. December 2008. For more on why tax expenditure estimates are not exact estimates of the amount of federal revenue that would be raised if they were eliminated, see the Methodology page of Pew’s Tax Expenditure Database.