The House of Representatives is about to pass a bipartisan health care and tax bill Wednesday to get rid of a long-hated part of the Affordable Care Act: the “Cadillac tax.”
The Cadillac tax levies a 40 percent tax on the most expensive employer-sponsored health insurance plans, those worth about $11,200 for individuals and $30,100 for families, starting in 2022. The tax on businesses would hit the part of the plan above the price threshold. It was supposed to go into effect in 2018 at a lower price threshold, but was delayed. Repealing the tax would cost the United States an estimated $197 billion over 10 years, according to an analysis by the Joint Committee on Taxation.
The House bill, the Middle Class Health Benefits Tax Repeal Act of 2019, has more than 350 co-sponsors and is expected to pass with bipartisan support. While Senate Republicans have shown interest in the bill, it’s not clear whether Senate Majority Leader Mitch McConnell will bring the bill up for a vote.
The Cadillac tax has been a controversial provision in Obamacare from the beginning — and almost by design. Its passage resulted in some strange ideological bedfellows. In 2008, John McCain campaigned on it. Obama’s advisers endorsed it. Sen. Marco Rubio included a Cadillac tax in his 2015 Obamacare repeal proposal. But in the 2016 presidential election, both Hillary Clinton and Sen. Bernie Sanders called to repeal it. Advocates for repealing the Cadillac tax include conservative chambers of commerce and big business.
But the issue remains divisive among Democrats and Republicans, even within their own parties.
The Cadillac tax was always controversial — and unpopular
The point of this tax was to encourage employers to offer less expensive health insurance. Sarah Kliff explained why for Vox in 2015:
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 economists and policy advisers under the Obama administration who supported the Cadillac tax argued that by encouraging companies to scale back insurance benefits, businesses would in turn give employees a wage increase (there’s some evidence that could happen). And, they said, it would only hit the wealthiest executives, most generous union plans, and major companies (which there’s not much evidence to support).
At the end of the day, the Cadillac tax was literally designed to encourage companies to make insurance plans worse. Not necessarily terrible — but just to reduce benefits and control costs.
“The Cadillac tax is one of the most important tools we have to control health care cost growth in the private sector,” the Committee for a Responsible Federal Budget, a deficit reduction think tank, said in a statement. “Repealing it will drive up health care costs while adding more than $1.2 trillion to the debt over the next two decades and reducing wages by trillions over that time period.”
That said, according to a 2018 study by the Kaiser Family Foundation, increases in deductibles for insured workers have outpaced any real wage increases for employees. So it makes sense that both businesses that would have to pay the tax and labor unions who negotiate generous health benefits for their members argued against it.
The Cadillac tax had some fundamental flaws
Advocates for the tax’s repeal point out a few fundamental problems with it.
First, it’s not just rich corporate bosses getting robust health care package; it’s teachers, state workers, and other employees who aren’t necessarily ultra-high earners. As Kliff writes that the Cadillac tax is a “blunt instrument”:
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.
Second, the way the tax is set up means it could affect more and more plans down the line. As written, the price threshold under the Cadillac tax rises with the rate of inflation. So in 2022, an analysis by the Kaiser Family Foundation found, 21 percent of employers would face the tax. But by 2030, 46 percent of employers would be hit.
That’s because health care costs typically grow faster than the economy. While in 2017, health care spending grew at nearly the same rate as the economy, last year the government projected that health care spending would rise by an average of about 1 percentage point faster than economic growth annually through 2026.
That means that down the road the Cadillac tax would no longer be on just the most expensive plans. It would hit much more than that.