Background
In general, only cash income is subject to the income tax. In-kind benefits—benefits that are received as goods or services rather than as cash—are not. Examples of in-kind benefits include public housing, the insurance value of Medicare coverage, and some food assistance programs (see also Medicare).
Taxing in-kind benefits would require taxpayers to make monetary payments on nonmonetary income. Doing so would impose a significant burden on people with low and moderate incomes because they have less money available. Taxing the value of pensions would mean that people would be asked to pay taxes on future income. Another frequent problem is the difficulty of determining an appropriate value of in-kind income, such as insurance benefits.
At the same time, the exclusion of in-kind benefits from taxation raises some concerns. First, excluding all in-kind benefits from taxation narrows the tax base. Thus, higher tax rates are needed on other forms of income. Many employer-provided benefits are not subject to tax. These include transportation benefits, flexible spending account contributions, and tuition assistance. This reduces the progressivity of the tax system since those with low and moderate incomes do not have access to such benefits.
Another issue involves the tax exclusion for employer-sponsored health insurance. An unlimited exclusion for employer-provided health insurance can create an incentive to obtain more expensive coverage. This reduces the incentive for health care cost containment.
TAXATION OF IN-KIND BENEFITS: Policy
TAXATION OF IN-KIND BENEFITS: Policy
Medicare and other in-kind benefits
Policymakers should not tax the actuarial value of Medicare or the value of other in-kind benefits (see also Medicare).
Health insurance
Eligibility for the exclusion for employer-provided health insurance should be determined based on the employer’s coverage rules.
When structured correctly, the exclusion for employer-sponsored health insurance may be an important method of encouraging health insurance coverage. Any revenue derived from the taxation of amounts above that threshold should be used to finance health insurance for families and individuals with low incomes or who are uninsured (see also Individual- and Employment-Based Group Plans).
Other employer-sponsored benefits
Limitations on the exclusions for other employer-provided benefits—such as life insurance, tuition, and parking—are a desirable method of broadening the tax base and making the income tax more progressive.
Pensions
Lawmakers should maintain the tax-deferred status of employer-provided pensions as a critical way of promoting retirement savings.