Eliminate the Income Tax Exclusion for Other Employer Fringe Benefits

The tax code currently excludes a variety of fringe benefits from income tax, distorting the incentives employers face when determining the makeup of employee compensation. Exclusions for disability insurance, life insurance, commuter benefits, educational assistance, tuition reduction benefits, on-site gyms, meals and lodging, employer awards, and other miscellaneous benefits favor these compensation types over taxable salaries and wages. Over time, fringe benefits have grown as a share of total labor compensation, due in part to this distortionary tax treatment.

This option removes the income tax exclusion for all the fringes listed above and includes their full value in taxable income for income tax purposes. This would increase the tax burden on labor income across the income spectrum, reducing returns to labor, hours worked, and economic output. It would improve the neutrality of the tax code by treating fringes the same way as wages and salaries.

On a conventional basis, this option would decrease the primary deficit by $571.6 billion over the budget window. Long-run GDP would fall by 0.2 percent, and long-run GNP by 0.1 percent. On a dynamic basis, the primary deficit would decrease by $396.8 billion from 2027 through 2036, $174.8 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 173.0 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.3 percent. The top quintile of taxpayers would experience a 0.3 percent decrease, whereas the bottom quintile would experience a slight decrease. On a long-run dynamic basis, taxpayers would see a 0.4 percent decrease on average.