Eliminate the Payroll Tax Exclusion for Other Employer Fringe Benefits

The tax code currently excludes a variety of fringe benefits from income and payroll 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 types of compensation over taxable salaries and wages. Over time, fringe benefits have comprised an increasingly larger share of total labor compensation, due in part to this distortionary tax treatment.

This option removes the payroll tax exclusion for all the fringes listed above. This would increase the tax burden on labor income, reducing returns to labor, hours worked, and economic output. Some taxpayers, however, would see a reduction in marginal tax rates because including the value of their fringe benefits in the payroll tax base would put their total income above the wage limit, offsetting some of the negative effect on output. It would improve the neutrality of the tax code by treating fringes the same way as wages and salaries for payroll tax purposes.

On a conventional basis, this option would decrease the primary deficit by $269.8 billion over the budget window. Long-run GDP would decline slightly, while long-run GNP would remain unchanged. On a dynamic basis, the primary deficit would decrease by $235.3 billion from 2027 through 2036, $34.5 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 174.1 percent by 2056.

On average, taxpayers would see decreases in their after-tax incomes of 0.1 percent on a conventional basis in 2036 and on a long-run dynamic basis.