Congress recently announced the delay of the "Cadillac Tax," the component of the Affordable Care Act (ACA) that taxes overly generous health care plans. The Obama administration considers it a central component of the ACA, while opponents deem it an unnecessary burden on businesses, if not an outright money grab by the government.
The Cadillac Tax was scheduled to take effect on January 1, 2018, but as a compromise in the end-of-year budget deal, the start date was moved back two years. Should the plan be delayed any further, allowed to go into effect, or killed outright? To consider the question properly, it is important to look at the reasons behind the Cadillac Tax and how it is to be implemented.
Part of the reason health care spending is rising (at least theoretically) is that businesses have incentive to offer generously subsidized health insurance in lieu of offering higher wages. Workers do not pay taxes on the health benefits, and therefore are willing to accept the benefits instead. More generous benefits lead to more generous use of the health care system, but not necessarily the most efficient use.
The Cadillac Tax adds an effective 40% excise tax on any plan that offers benefits worth more than $10,000 as an individual or $27,500 per family (with a few exceptions for things like hazardous jobs). Thus, the Cadillac Tax serves several purposes: it encourages more efficient use of health care by curtailing overly generous programs, while generating income to increase coverage for those who need insurance but cannot afford it. In essence, it levels the playing field. Theoretically, the Cadillac Tax should also induce employers to pay higher wages instead of providing those generous benefits, but this is a large assumption to make.
Opponents of the Cadillac Tax come from both sides of the aisle. Some Democrats oppose the plan because it disproportionately hits their union constituencies. Republicans look at it as part of the continuing governmental power grab and argue that it is misguided to tax employers for health care costs that are outside of their control. They fear a gradual shift in the threshold that tilts more toward taxation.
The Kaiser Family Foundation has released estimates stating that the Cadillac Tax will affect just over one-quarter of employers during the first year of implementation, and if insurance premiums increase faster than inflation — a very plausible scenario — the number of affected employers should rise to become a majority. Theoretically, all employers could eventually be subject to the tax.
The National Association of Manufacturers (NAM) recently released a study concluding that with moderate health insurance premiums, 30% of employers would be subject to the tax by 2025, rising to 80% by 2035. NAM projects 2.6 million job losses by that date, along with a GDP reduction of 1.7% based on the tax burden.
Many businesses have begun to adjust their health insurance offerings to avoid the Cadillac Tax by gradually raising deductibles, effectively increasing out-of-pocket expenses through coverage changes and shifting more of the burden to the employee. In a way, the Cadillac Tax is fulfilling one of its goals just from the mere threat of implementation. Repealing the Cadillac Tax removes that threat.
There are reasonable arguments as well as flimsy assumptions supporting any of the three actions (delay, repeal, or implement). As more data is gathered on health care costs without the Cadillac Tax taking effect, we should have a better view of the likely effectiveness of the Cadillac Tax by the proposed 2020 implementation date.