Republican legislators need a way to pay for their eventual Obamacare replacement plan. One leading contender is capping the tax exclusion for employer-sponsored health insurance, which shows up in multiple replacement plans as well as recent interviews with legislators. It’s going to be a huge fight.
Right now, companies and their workers pay no taxes on health benefits. This means the federal government misses out on a lot of potential revenue — $260 billion in 2013, according to Congressional Budget Office data.
Capturing a fraction of that would go a long way toward paying for some of the other things Republicans want to do, like continue subsidizing the individual market. But it won’t be easy: An aggressive lobbying campaign has already begun against the policy, which Republicans have not officially endorsed.
Representatives of large companies are already swarming Capitol Hill, meeting with legislators to argue that this would amount to a significant tax on America’s middle class. Some have retained new lobbying firms and launched new coalitions devoted to making sure the proposal never sees the light of day.
“I think it’s being considered very seriously, and we’ve recently ratcheted up our message to make sure that legislators understand the unintended consequences of a policy like this,” says Jim Klein, president of the American Benefits Council, which lobbies on behalf of major corporations offering health benefit programs.
His organization has, for years now, fought against the Affordable Care Act’s “Cadillac tax.” In mid-February, they shifted focus and started a second campaign: Don’t Tax My Health Care, targeted at new Republican efforts.
Both conservative and liberal economists tend to like the idea of capping (or eliminating) the exclusion for employer-sponsored coverage. They argue that the exclusion is regressive, creating a tax benefit only for higher-income people who are more likely to get coverage at work. It encourages companies to provide more generous benefit packages that drive up health spending, because the tax preference makes their dollars go further.
But even if the economic consensus is against the tax exclusion, the political consensus is completely for it. Repealing it could drive up the cost of health coverage for millions of Americans — not exactly a winning campaign slogan.
“This is one of the oldest issues in all of health policy,” says Joe Antos, an economist at the American Enterprise Institute. “We’re not seeing anything new, as far as the politics are concerned: Nobody is in favor of creating a new tax.”
The employer-sponsored tax exclusion, explained
America is exceptional in that we are the only developed country with an employer-based health insurance system — and our tax code completely explains why.
The Internal Revenue Code of 1954 codified the policy that companies can provide health insurance benefits to workers tax-free. This affirmed a 1943 Tax Court ruling that had also decreed health benefits to be nontaxable.
"It’s a huge discount off the price of health insurance," says Melissa Thomasson, an economist at Ohio’s Miami University who has written extensively on the history of health insurance. "And it happened very quietly. I looked a few years ago to find out the name of who made the decision, and it's been lost to history."
Flash-forward about 80 years or so, and the health insurance tax break is the biggest in the federal budget. It’s regressive; we've created a tax system wherein the people with good jobs are getting their health care subsidized by the people with worse jobs or even no jobs.
The tax exclusion also drives up demand for expensive health insurance. This is partly because of the subsidy. But it's partly because employees usually don't know the real prices of their health benefits. Though ultimately economists believe that the money employers spend on health benefits comes from the money they would have spent on wages, workers don't feel the direct cost of their health insurance choices, so they have little reason to try to keep spending low.
Economists hate the tax break for health insurance. Politicians love it.
Doing away with the tax exclusion might seem like a no-brainer, but it's very politically difficult. It would mean a huge price increase on employer-sponsored insurance, which is not a popular platform to run on.
John McCain got nailed for suggesting capping the tax exclusion in his 2008 campaign. He was targeted with what became the most frequently aired political ad of the past decade.
“McCain would tax health insurance for the first time ever,” the spooky voiceover warns. “His plan would raise costs for employers offering health care, so your coverage could be reduced or dropped completely.”
That experience left many conservatives skittish about going down this road again. As former Republican Senate staffer Chris Jacobs tweeted, “conservative health wonks” still have “PTSD” from the McCain experience.
Ironically, President Obama’s health law managed to make some inroads on the issue. It includes a 40 percent tax on the most expensive insurance plans. Know as the Cadillac tax, this fine will hit any insurance plans that cost more than $10,200 for an individual or $27,500 for a family.
But whether it will come into effect is still unclear: In late 2015, Obama pushed its implementation back from 2018 to 2020.
Republican legislators, meanwhile, are now being treated to some of the pushback that McCain faced when he suggested capping the tax exclusion.
The insurance broker firm Lockton helps negotiate health benefits for large companies that collectively employee 10 million people. Last week, it hired the DC-based lobbying firm BGR to help make its message clear on Capitol Hill: Don’t mess with the employer market.
“During meetings on Capitol Hill last week, there were acknowledgements of the role of the group market and a commitment to not disrupting that,” says Ed Fensholt, a senior vice president at Lockton. “I think there was, however, a lack of understanding that certain things they do might have a disruptive effect.”
All of this is happening before Republicans have even introduced their Obamacare replacement. This lobbying frenzy makes people like Antos, who has watched this battle before, skeptical that the current crop of legislators will have any more success capping the employer-sponsored tax exclusion.
“This is one fight you’re not going to be able to get through the Senate,” he says. “You can spend a lot of political capital on it, but you’re not going to make any progress.”