Republicans are ramping up their consideration of a controversial policy to reduce tax breaks for employer-sponsored health insurance, drawing increasing ire from a diverse coalition of business and labor groups.

The idea of scaling back the tax benefits for the more than 155 million people who get their coverage at work is generating so much concern that it has united those groups in staunch opposition. 

In their conversations about repealing and replacing the 2010 health care law, House Republicans are increasingly targeting a longstanding policy that makes employers’ contributions to their workers’ health insurance premiums exempt from federal income and payroll taxes. Republicans, led by Ways and Means Chairman Kevin Brady of Texas, say capping that tax break would make the code more fair — and, perhaps more importantly, would generate trillions in revenue over several years that could be tapped to pay for other changes to the health care system.

“Unlocking the tax credit that belongs to people that’s only available at work, so that it can be used outside of work, obviously I think is a very strong idea. It’s a way in my view to provide that financing  . . .  [for] that monthly affordable credit that really lies at the heart of our backpack,” Brady told CQ Roll Call Tuesday. “Our goal is to unlock a small portion of the tax break individuals get.”

The topic also featured prominently in Brady’s remarks to the entire Republican conference last week in a closed-door session. The Washington Post first posted the leaked audio recording of the discussion.

Several lobbyists suggested capping the employer tax exclusion is being considered as a policy change in the Senate Finance Committee, though many said the effort is promoted most by Ways and Means members. The lobbyists and other sources said there’s little consensus on exactly how to cap the tax break for job-related insurance or whether to include it on the first or second reconciliation measure expected this year. Finance Committee aides didn’t comment.

Groups including the U.S. Chamber of Commerce, the Alliance to Fight the 40 coalition, the AFL-CIO, the National Retail Federation and the ERISA Industry Council say the policy would destabilize the otherwise relatively healthy employer market.  

That coalition is an especially powerful one. Many of the same groups successfully lobbied to delay implementation of the so-called Cadillac tax on expensive health plans, convincing broad bipartisan majorities of both chambers to oppose the policy. They see the proposed cap on the tax break for employer-sponsored health insurance as similar.

The Alliance to Fight the 40, an advocacy group with major members like ExxonMobil Corp., Procter and Gamble Co. and Cigna Corp., is even planning to rebrand under a new name for a campaign that will focus more broadly on both the Cadillac tax and the employer tax break, lobbyists and others outside of the group said. The group’s meetings with lawmakers and staff have already included discussions about the job-provided tax break, representatives of member organizations confirmed.

“The audio recording made clear the disturbing fact that Congress is considering taxing health benefits provided by employers, meaning higher income taxes for millions,” The Alliance to Fight the 40 said in a statement to CQ Tuesday. “The employer-sponsored health care system is efficient and effective in covering over 177 million Americans. Congress should protect the health care of working families.”

If they move forward, Brady and his colleagues will have to convince reluctant lawmakers as well as those groups. Sen. Bill Cassidy of Louisiana, who sits on both committees with jurisdiction over health care issues in the upper chamber, is vocally opposed to a cap. He says it would be better to pay for any health care law replacement with the same industry taxes that paid for the law.

“Pharma’s done very well for the last eight years. They’re going to get their taxes repealed, but the middle class is going to suddenly pay more? I’m not sure I see the benefit there,” he said Monday, referring to the drug industry. “It’s going to be placed on the back of the middle class that hasn’t done very well for the last eight years?”

Cassidy’s not alone. At an April hearing at Ways and Means, GOP Reps. Dave Reichert of Washington, Jim Renacci of Ohio and Mike Kelly of Pennsylvania, among others, voiced concerns about upending the exclusion.

Pros and cons

The tax exclusion is the largest subsidy provided through the tax code. The federal government foregoes more than $250 billion a year because nearly all premiums for employer-sponsored health insurance are excluded from federal income and payroll taxes, according to the Congressional Budget Office. 

Economists and others say capping the exclusion would reduce waste in the health care system by encouraging employers to adopt less generous plans that give patients more incentive to monitor their own health spending. Economists argue a cap also would distribute tax benefits more evenly and avoid singling out people with jobs for a tax break.

House Republicans say their specific plan — which is laid out in some detail in the plan endorsed by Speaker Paul D. Ryan, R-Wis., known as A Better Way — would cap the exclusion so that it limited “only the most generous plans.” They believe employers would rewrite their health plans to avoid hitting the cap, shifting that money toward higher take-home pay. Their proposal, however, doesn’t spell out the specifics of when the cap would be triggered.

Republicans also argue that their proposal is less of a “punishment” than the health care law’s so-called Cadillac tax that was designed to impose a 40 percent tax on especially high-cost health plans. Congress delayed its implementation.

CBO has suggested, however, that capping the subsidy would reduce the number of people with employer-sponsored insurance and increase the financial burden for Americans with high medical costs.

Opponents, too, argue that the cap would destabilize the employer insurance market at a time when it is one of the most stable.

“It would be a cruel hoax on the American public if replacement for the Affordable Care Act is a measure that now taxes their health benefits,” said Jim Klein, president of the American Benefits Council, a member of the Alliance in an interview. “The individual marketplace is so fragile. We need to stabilize the individual marketplace and not destabilize the employer-sponsored system that covers more than half of all Americans.”

The U.S. Chamber of Commerce joined the American Benefits Council and a host of other groups, including the National Retail Federation and the National Business Group on Health, on a Dec. 15 letter to Congress on the issue. 

“We support efforts aimed at controlling health care costs, but taxing an employer’s deduction or capping an employee’s exclusion will not accomplish that objective. On the contrary, both measures will raise costs for employers and employees,” the groups wrote.

The issue has been at the center of the AFL-CIO’s lobbying, too, said Tom Liebfried, a health care lobbyist for the group. He pushed back on the idea that the plan could be limited to only high-income individuals.

“This idea that you can just hit people at the top — If you really need to pay for something, it very quickly gets into what everybody considers ‘middle class,’” he said.