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Bernie Sanders and Big Business both hate this Obamacare provision — because it’s working


Obamacare’s Cadillac tax has accrued a very eclectic crew of opponents that now includes both socialist Sen. Bernie Sanders (I-VT) and the conservative Chamber of Commerce. Public unions and private insurers have all lined up against the provision. But this isn't because the tax is some kind of a disaster. Opposition is getting fiercer because the tax is working.

Let’s unpack that a bit.

The Cadillac tax places a heavy 40 percent tax on the most expensive health insurance plans. In 2018, it kicks in for individual plans that cost more than $10,200 and family plans above $27,500. The tax only hits the part of the plan above the threshold — so in 2018, an individual plan that costs $11,200 would get a $400 tax.

Traditionally, the government doesn’t tax employer-sponsored insurance. This has created a huge incentive for companies to spend more money on generous insurance plans and less on cash wages. This, in turn, pushes up health-care costs across the system. When workers have expensive plans with no copays or deductibles, they’re likely to use lots of health care, including trips to the doctor they don’t really need.

The whole point of the Cadillac tax was to push employers in the opposite direction, and offer their workers less robust benefit packages. This would, for Obamacare, have two positive effects.

  1. It helps control overall health-care spending. More financial barriers to care generally have the effect of pushing patients to think twice about a trip to the doctor.
  2. It raises wages (and income tax revenue). There's a vast body of economics research that shows workers bear the cost of more expensive health plans with lower wages. These papers suggest there's a lump sum amount that companies spend compensating workers — when benefits get stingier, wages go up.

In fact, much of the revenue the government gets from the Cadillac tax will likely be in the form of taxes on increased wages. Bradley Herring, a Johns Hopkins economist, has estimated that between 2020 and 2029, the Cadillac tax will raise $930 billion in revenue. Of that, $550 billion will come from the tax directly. Another $375 billion will be from increased payroll taxes paid on newly increased wages.

The Cadillac tax was crafted to be unpopular

As the Cadillac tax’s implementation nears, companies have begun to take steps to get their plans under the 2018 threshold. The Kaiser Family Foundation recently found that 13 percent of large companies have already changed their coverage to avoid getting hit with new fees — and 53 percent have at least researched the possibility.

employers cadillac tax

(Kaiser Family Foundation)

The whole point of the Cadillac tax was to make health insurance plans lousier — not to make them terrible, by any means, as these are the more expensive plans on the market right now. But its whole goal is to reduce the quality of benefits that workers receive. So it’s no wonder workers are frustrated, now that employers are working toward that policy aim. And it’s little surprise that repealing the Cadillac tax is quickly becoming a bipartisan juggernaut in Washington, as reduced health benefits are one very tangible way voters can see Obamacare’s effects.

The fact that consumers and legislators are beginning to get furious about the Cadillac tax isn’t evidence that the law is broken. Quite the opposite: It shows that the Democrats are accomplishing a key policy goal — reducing the size of health benefit packages — and happening to make voters quite angry in the process.

The real problem with the Cadillac tax: It won’t just hit "Goldman Sachs" plans

When Democrats talked about the Cadillac tax during the health reform debate, they would often discuss it as a tax targeting the ultra-rich. Obama adviser David Axelrod described it in 2009 as "an excise tax on high-end health care policies like the ones that executives at Goldman Sachs have."

That’s not quite right, and it’s at the core of one of the best critiques of the Cadillac tax. It will likely hit some bankers but will also reduce benefits for people we don’t think of as rich, like teachers. These are workers who tend to have robust insurance plans and who have, to some degree, accepted lower wages in return.

The most cutting critique of the Cadillac tax is that it's a blunt instrument that doesn't take into account granularities in the health-care system. There's no adjustment, for example, for people who live in places where health care is really expensive — so the threshold is the same in the Midwest, where health insurance is pretty cheap, as it is in remote states like Alaska, where it's more expensive to deliver health care. It’s the same for teachers as it is for bankers, for someone who has a chronic disease that really does require many doctor visits and for someone who is perfectly healthy.

This is a perennial tension in any policies that aim to constrain health-care spending. The hope is to squeeze out the unnecessary spending — but still protect those who really do need significant medical services. And it’s not clear, as the Cadillac tax comes into effect, how it will strike that balance.