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Tax Subsidies for Private Health Insurance

Appendix A. Calculation of Tax Reduction for ESI Tax Exclusion Examples

The tax reductions shown in this paper were calculated using Taxsim Version 9, which is a program that permits users to calculate federal and state taxes for individuals and families with various characteristics. For this exercise we calculated each family’s tax liability under current law and then recalculated it assuming that the family received the amount of the employer contribution for health insurance as additional wage income. The differences in the federal and state income tax liability and the FICA tax liability are the reduction amounts shown in the figures. For example, one of the sample families has $60,000 in wage income and a $10,000 health insurance contribution from their employer. The family contributes their share of the $12,500 premium, or $2,500, through a Section 125 plan. For the comparison, we first reduced the family’s wage income to $48,500, reflecting that the family is able to pay their $2,500 share of the premium with pre-tax income, and then calculated the federal, state, and FICA taxes. We then recalculated the family’s tax liability assuming wage income of $60,000 ($50,000 of wage income, all of it subject to tax, plus $10,000 of income equal to the employer’s contribution to health insurance). The tax liability differences between these two scenarios are the tax reduction amounts shown in the figures.

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