The 'Cadillac Tax' Makes Everyone Sick
By Tevi Troy
13 October 2015
The Wall Street Journal
In apparent recognition of the distinct unpopularity of the Affordable Care Act's Cadillac tax -- an excise tax on high-value, employer-provided health benefits -- more than 100 economists have signed a letter defending it. As the Washington Post headline about the letter read: "101 Economists Just Signed a Love Letter to the Obamacare Provision Everyone Else Hates."
As of 2018, the excise will impose a 40% levy on employer-sponsored health plans whose value exceeds $12,500 for an individual and $27,500 for a family. The definition of value includes all benefits, such as wellness plans or employer contributions to flexible spending accounts, and the tax is intended to get employers to reduce the benefits these high-cost plans confer (and perhaps even to encourage employers to stop providing health care to employees so they migrate toward the ACA exchanges). Some 175 million Americans are enrolled in employer-sponsored health plans, and the tax will affect increasing numbers of plan holders. This is why the tax is so widely disliked, even before anyone is directly affected by it.
The Cadillac tax is so disliked that politicians and interest groups on both sides of the aisle want to get rid of it.
There are few health-care issues that unite Hillary Clinton and Bernie Sanders with congressional Republicans, or unite unions with business, but opposition to the excise tax is one. Mrs. Clinton and Mr. Sanders have declared their opposition to the tax, while multiple congressional bills would eliminate it.
The reason the tax has so many opponents is its impact on American workers. It is going to force employers, who understandably do not want to pay the steep 40% levy, to reduce the benefits they offer in order to bring the costs of their plans below the ACA's value threshold.
Worse, because the thresholds at which the tax kicks in for individuals and families are indexed to overall inflation and not to faster-rising health-care costs, the tax will have a creeping impact on employees. Like the dreaded Alternative Minimum Tax, which was designed to hit fewer than 155 wealthy Americans in 1969 but now impacts 4.2 million households with incomes of $83,400 or more, the Cadillac tax will pull more and more Americans into its net.
According to a new study by the American Health Policy Institute, the excise tax is already forcing American employers to revisit the health care they provide to employees. Almost 90% of large employers surveyed by AHPI reported taking steps to prevent their company from having a plan that triggers the excise tax in 2018.
Nineteen percent of those surveyed -- top human-resource officers at companies with more than 1,000 employees -- said they were already curtailing or eliminating employee contributions to flexible-spending accounts to avoid triggering the tax. Nearly 13% were already curtailing or eliminating employee contributions to health savings accounts. Both FSAs and HSAs are popular ways for employees to cope with the increasing number of high-deductible health plans, as they allow workers to save for growing out-of-pocket health costs.
When employers respond to the tax by shrinking the value of employee health plans, that amounts to a reduction in the overall compensation package employees are getting. Supporters of the tax theorize that workers will get wage increases to offset the fact that their benefit package has been reduced. In reality, 71% of large employers surveyed by the American Health Policy Institute said they probably wouldn't increase wages to offset their reduction in health benefits. Among the 16% of employers who said they would increase wages, their workers are not necessarily better off: Unlike the lost benefits, wage increases will be subject to income tax.
Providing some kind of limit to the amount of the tax advantage employers get for providing health care to employees could make some sense if it were designed the right way -- for instance, by making some portion of employer-provided health benefits taxable above a certain income ceiling, without penalizing lower-wage employees. But the consistent unpopularity of the proposed excise tax and the bipartisan efforts to eliminate it reveal that American people of all incomes understand better than the 101 economists the costs of the Cadillac tax and the damage it would do.
Mr. Troy is the president of the American Health Policy Institute and a former deputy secretary of the Department of Health and Human Services in the George W. Bush administration.