The objective of this study was to understand how changes in federal taxation of and employer contributions to health insurance benefits affect the decisions of firms to offer insurance, the willingness of households to purchase different health plans, and the resultant health expenditures. The study looked at a total of 18,343 sampled families (representing 77 million total families throughout the United States) with a working household head from the 1988 Current Population Survey who were not covered by either Medicare, Medicaid, or CHAMPUS insurance. Tax-free employer contributions to health insurance premiums are limited to 80 percent of an estimated base plan in the market, assuming that employer contributions will also be limited to this maximum. As well, favorable tax treatment of employer-paid premiums is eliminated altogether assuming that employees will pay the full price of insurance. Results show that capping the favorable tax treatment and employer contributions decreases the number of families offered employment-based insurance by about 91,000, increases the number of families selecting the least generous insurance plan from 20 percent under the current situation to 33 percent, and reduces overall health spending by less than 2 percent. By eliminating the tax exemption altogether, the number of families offered employment-based insurance decreases by approximately half a million families, the number of families selecting the least generous plan goes from 20 percent to 40 percent, and overall spending falls by about $16 billion. The authors conclude that eliminating the tax subsidy and limiting employer-paid contributions to the low-cost plan substantially increases the number of low-income uninsured under a voluntary insurance system, decreases overall spending only modestly, but would raise tax revenues by $36 billion. These tax revenues could be used to assist low-income families to obtain insurance coverage.