The IRS plays a key role in making health insurance affordable for most Americans– not just people getting subsidies through HealthCare.gov. Today, most adults get a tax subsidy to purchase insurance – and the reason they do is because the IRS made an interpretation of the tax law.
The US health insurance system rests on fact that more than half of the population has insurance through an employer. Employer-sponsored insurance often provides robust benefits because large employers can pool their risk and manage health care costs by negotiating with providers and insurers who administer the plans. Why do we get health insurance from our employer? Because it’s not taxed.
So why don’t we tax health insurance? The short answer is World War II.
The long answer:
Health insurance started as an idea as we advanced health care in the United States. Employers began providing not for profit insurance as a benefit and the IRS did not have any rules for how to treat health insurance. Generally, benefits like this were not taxed– but the tax code was a lot less complicated at that point.
In 1943, the war effort was the economic focus and wages were frozen. Employers needed something to attract new employees. The IRS explicitly ruled that health insurance was not taxable for these purposes. Let me repeat that- the IRS interpreted that health insurance was not taxable. Looking for revenue in 1953, the IRS reversed this decision and took action to start taxing health insurance. Congress disagreed with that interpretation. Did they go to the Supreme Court? No, they passed a law. The Internal Revenue Code of 1954 reversed this interpretation.
Not taxing health insurance provided by employers is the same as saying that each person gets an tax subsidy. Employees receive a product– that has monetary value– and are not taxed. Collectively, that’s a subsidy estimated at $250 billion a year to 149 million people.
This has very little to do with the legal arguments around the King v. Burwell case, but politically it is important. Agencies interpret the laws Congress passes. If Congress disagrees with the agencies, it is the responsibility of Congress to act.
Subsidies for health insurance aren’t rare- in fact the federal government makes health coverage affordable for Americans in many ways- through Medicare, Medicaid, the VA, or through tax subsidies in the Marketplace or through an employer. The IRS has made both of these subsidies possible.