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Introduction

The federal government provides substantial incentives for the purchase of private health insurance through the tax code. These tax incentives for health insurance are among the most important ways the federal government influences health care in the United States.

In fiscal year 1980, tax subsidies for private health insurance are expected to generate tax expenditures of $10.6 billion for taxpayers at all income levels (Table 1 shows the distribution by income class). Of this amount, $9.6 billion results from the provision that excludes from employees' taxable income any contributions made by their employers for a health or accident insurance plan. These contributions are also fully deductible by the employer. Another $1.0 billion results from the fact that individuals can deduct from taxable income half the first $300 worth of health insurance premiums they pay themselves, plus any remaining health insurance premiums if these premiums and their other out-of-pocket medical expenditures exceed 3 percent of adjusted gross income. In size, the tax expenditures for health insurance exceed all but two other tax expenditures for individuals (see Table 2). In comparison with direct federal expenditures for health care, they rank just behind Medicare and Medicaid (see Table 3).

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