Tax Policy:

Effects of Changing the Tax Treatment of Fringe Benefits

GGD-92-43: Published: Apr 7, 1992. Publicly Released: Apr 7, 1992.

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GAO reviewed the current tax treatment of employer-provided fringe benefits, focusing on: (1) the history and background of the exclusion of those benefits from taxable income; (2) the percentage of workers receiving such benefits and the types of benefits received; (3) the estimated amount of taxes foregone because of those benefits' tax-preferred status; and (4) how changes in the tax treatment of those benefits may affect tax equity and the level of benefits provided.

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.

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