Tax Policy

The Department of the Treasury is expected to forgo about $91 billion in tax revenues this year because employer-provided fringe benefits are excluded from taxable income. Proposals have been put forth to change the tax treatment of these benefits either by restricting the extent of subsidized benefits to reduce the deficit or lower income tax rates or by expanding benefit coverage. This report discusses employee benefit tax policy issues as they relate to four of the more common employer-provided fringe benefits: pensions, health and life insurance, and flexible benefits. For each benefit, GAO discusses (1) historical and legislative background, (2) data on employers who provide and employees who are covered by these benefits, (3) estimated tax expenditure data, and (4) the implications of taxing these benefits.

GAO found that: (1) estimated fiscal year 1992 tax expenditures for employer-provided fringe benefits will exceed $91 billion; (2) the suitability of continuing such tax preferences is questionable in view of the large federal deficit, benefit provision inequities, and overspending on tax-preferred benefits; (3) tax inequities exist between recipients and nonrecipients of pension benefits and among recipients in different tax brackets; (4) proposals to tax pension benefits, involving employee and employer payments for pension value or financial transactions, could place a significant burden on employees, increase employer costs, and affect national savings trends; (5) most employees have employer-provided health insurance coverage, although coverage varies substantially; (6) inclusion of employer-provided health insurance coverage in taxable income could improve tax equity between benefit recipients and nonrecipients and among those receiving different amounts of benefits, and encourage employees and employers to economize in their selection of benefits; (7) most full-time employees have employer-provided life insurance benefits, although coverage varies significantly; (8) options for taxing employer-provided life insurance benefits involve eliminating inequities caused by age or self-employment; (9) changing the tax treatment of flexible benefit plans could increase revenues and improve equity regarding use of pre-tax and after-tax income; and (10) alternatives to fully taxing employer-provided benefits involve ceilings on tax-free benefits provided or credits against taxes paid.