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Two experts on health policy debate the issue.
The reach of the tax will grow over time to include average family health care plans.
In fact, large employers subject to the tax in 2018 will pay an average of $1 million that year, and an average of $2.1 million per year from 2018 to 2024—which equates to more than $2,700 per employee per year.
At the individual level, from 2018 to 2024 the excise tax could cost 12.1 million workers an average of $1,050 in higher annual payroll and income taxes, if employers increase employees’ taxable wages as they reduce the cost of health care benefits. And if employers increase the taxable wages of employees—which is not a given in the current business cycle—a significant portion of the increase in take-home pay may be spent on higher out-of-pocket health care expenses as deductibles and out-of-pocket limits increase. Alternatively, these workers could see up to a $6,150 reduction in their health care benefits and little or no increase in their pay.
What’s worse, the excise tax will affect an increasing number of employees over time—beyond just those with so-called Cadillac plans. Although it will initially target a relatively small portion of expensive health plans, within 20 years the impact of the Cadillac tax will be broader.
In 2018, for example, the tax is anticipated to affect 17 percent of all American businesses and 38 percent of large employers. And by 2031, the cost of the average family health care plan is expected to hit the excise tax threshold.
The tax’s creeping reach is reminiscent of the alternative minimum tax, which was initially designed to include only the wealthiest taxpayers but eventually hit middle-class taxpayers.
One obstacle to repealing this tax, or any tax, is the lost revenue that would result. But on this front, the tax’s advocates will likely be disappointed.
The Congressional Budget Office (CBO) estimated in January 2015 that the excise tax will generate a total of $116 billion from 2018 to 2024. That means Congress would have to find $116 billion in spending cuts in order to “pay for” an excise tax repeal.
It appears, however, that the tax may not generate as much revenue as originally anticipated, which would make it easier to offset the cost of a repeal. If, as predicted, employers are successful in reducing their excise tax exposure by 50 percent over the next 10 years, it is possible that the amount of revenue generated by the excise tax will be just $42 billion from 2018 to 2024, or about a third of what the CBO has projected.
Given the excise tax’s likely expansive reach, it is one of the ACA’s more problematic provisions. When you look at its probable low-revenue potential, it becomes clear that the Cadillac tax is one of the more vulnerable provisions as well. Congress should act quickly to repeal it.
Tevi Troy is president of the American Health Policy Institute and a former deputy secretary of the U.S. Department of Health and Human Services.
It encourages companies and workers to choose less costly health insurance.
In private, almost all Democratic and Republican policy experts will tell you that they oppose the current exclusion of employer-financed health insurance from income and payroll taxes. They take issue with it because the exclusion costs the U.S. Treasury approximately $250 billion annually, disproportionately benefits high-bracket filers, and encourages everyone to buy inefficiently costly or overly comprehensive coverage.
Although few health policy experts defend our current tax treatment of employer-financed health insurance, most voters, employers and interest groups see the issue differently. John McCain painfully discovered this reality in his 2008 presidential campaign, when he proposed ending the tax exclusion of health insurance premiums. The Obama administration also faced political heat when it proposed the more modest “Cadillac tax” as one of the measures to finance the ACA. The inclusion of this measure showed a real commitment to control costs and genuine political courage, as the most intense opposition came from organized labor and other Democratic constituencies.
The Cadillac tax is set to begin in 2018. It will be imposed only on health plans whose total annual value exceeds $10,200 for individual coverage and $27,500 for family coverage. Various adjustments will be made if premiums grow rapidly between 2010 and 2018. Starting in 2020, the levels will increase at a rate pegged to the general rate of inflation. Initially, the 40 percent tax will be imposed only on a small portion of costly insurance plans that exceed those levels, and it will apply only to the portion of premiums above the thresholds. As a result, the tax will not affect the plans that cover most Americans who receive employer-sponsored coverage.
Still, the Congressional Budget Office estimates that the Cadillac tax will raise something like $21 billion in 2025. That is enough to pay for the Children’s Health Insurance Program, Head Start and other worthy investments. The tax will yield less revenue if health care spending continues its current slow growth. It will also yield less revenue if it encourages companies and workers to choose more-disciplined forms of coverage. Either outcome would be good news. The associated savings would likely support higher wages and improved employee benefits.
Political reality shaped the design and enactment of the Cadillac tax. Although I would have preferred something simpler and more progressive, the tax is a good first step toward curbing the distortions that result from unlimited exclusion of health insurance from income and payroll taxes. If the Cadillac tax were repealed, the accompanying revenue would have to be replaced—by higher taxes of some other kind or by cuts in government spending, which has already been slashed too much by sequestration.
Controlling the cost of health insurance and curbing popular tax breaks predictably attracts bipartisan political opposition. But the Cadillac tax is still good policy.
Harold Pollack is the Helen Ross professor of social service administration and public health sciences at the University of Chicago. He is also a nonresident fellow of The Century Foundation.
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