The Hidden Cost of Premium Taxes on Health Insurance

Across the United States, states are considering new taxes, assessments, and fees related to health care as they face budget pressures and rising health care costs. While these proposals vary widely, they all risk increasing costs for patients, families, and employers without addressing the underlying drivers of health care spending.

States take different approaches to taxing health insurance. Some exempt health coverage from premium taxes or similar assessments, while others apply varying tax rates or fees. These taxes increase the cost of coverage for employers and working families, and contribute to rising health care costs across the country.

Interactive Map

Where These Taxes Come From

Taxes on health insurance premiums are often part of broader efforts to raise revenue for the state.

Because insurance premiums are relatively stable and administratively easy to collect, policymakers have frequently relied on these taxes to support state spending. Ultimately, these costs are typically passed through to employers and families in the form of higher premiums and reduced wage growth.

The Cost of Taxes on Health Coverage

While tax rates vary by state, taxes and assessments on health insurance premiums can add hundreds of dollars per year to the cost of family coverage. A family is defined as the average family of four.

Example: Average Premium Increase from State Tax

• $24,540
  Average annual family health insurance premium, nationally

• 6.64%
  Average premium tax rate
• $1,630
  Estimated taxes on premiums paid

What This Means in Practice

For Employers

A small employer offering family health coverage may pay more than $24,540 per employee family each year. Taxes embedded in premiums can add significant costs that accumulate quickly across a workforce. For employers covering dozens of workers, these taxes can total tens of thousands of dollars annually, influencing decisions related to wages, hiring, business expansion, and employee benefits.

For Working Families

Families with employer-sponsored coverage typically pay for health insurance through payroll contributions and foregone wages. These taxes are not visible, but they increase the overall cost of coverage. For families managing household budgets or ongoing medical expenses, these additional costs can limit spending on essentials such as childcare, groceries, housing, or savings.

Why It Matters for Affordability

Rising health care costs make it increasingly difficult for employers to maintain comprehensive coverage for their employees. In some cases, higher insurance costs may lead employers to slow wage growth, delay hiring, or scale back benefits.

Taxes embedded in health insurance premiums ultimately affect households through higher premiums, lower wages, or increased out-of-pocket costs. Even modest tax rates can significantly increase the cost of coverage over time.

These taxes are often criticized for being regressive, disproportionately affecting middle-income families and individuals with chronic health conditions. These households typically face higher health care utilization and have less flexibility to absorb additional expenses.

Key Takeaway

Health insurance is an essential expense for working families and employer competitiveness. State tax policies play a significant role in driving up the overall cost of coverage, with direct impacts on affordability, workforce stability, and economic competitiveness.

Source: KFF, U.S. Chamber of Commerce analysis using national employer-sponsored insurance data