Far from a threat, however, this is one provision of Obamacare that liberals, conservatives and everyone in between should be able to agree on. It’s simple, fair and — because it fine-tunes market signals to businesses and consumers — likely to further the law’s avowed purposes of expanding coverage while taming costs.
Nearly half of Americans get health insurance through their employers; a tax exclusion for its value encourages businesses to provide coverage. This is the nation’s largest tax expenditure, expected to cost $760.4 billion over the next five years, according to Congress’s Joint Committee on Taxation.
Many economists hate this provision because it unduly insulates people from the true costs of care and thus encourages excessive consumption — which fuels health-care inflation generally. Wall Street executives and other rich Americans benefit disproportionately but so do labor unions, which have gotten into the habit of extracting tax-free health benefits from employers in lieu of wages.
The ideal solution would be to eliminate or sharply reduce this tax exclusion and use the revenue to finance a health insurance system that does not tie workers to their jobs — another of the policy’s pernicious side effects.
But that idea, which John McCain embraced and Barack Obama opposed during the 2008 campaign, got shot down early in the 2009 debate. Senate Finance Committee Chairman Max Baucus (D-Mont.) floated an excise tax on the priciest 40 percent of plans, only to back down in the face of furious objections from labor.
What survived was a 40 percent tax on the value of an employer-provided health plan that exceeds $10,200 for individuals and $27,500 for families. When the tax goes into effect in 2018, it will hit 16 percent of employer-paid plans, according to a recent paper by economist Bradley Herring of Johns Hopkins University and government insurance specialist Lisa Korin Lentz.
Thereafter, the tax will hit more and more plans because of health-care cost inflation. Herring and Lentz estimate that 75 percent of all health plans would be subject to the tax by 2029. It will raise $931 billion in its first decade; importantly, however, about 38 percent of that money comes not from the tax itself but rather from the shift of employee compensation from health benefits to wages, which would then be subject to income and payroll taxes.
Anticipating the tax, some companies are adjusting coverage now. More are offering employees higher-deductible plans and other incentives to economize, a trend that may be contributing to the overall slowing of health-care inflation, according to a recent New York Times report.
That’s basically good news. Still, the Obamacare excise tax is a second- or third-best solution to the distortions and inequities wrought by the tax exclusion. It does not fully account for actuarial variables such as the average age and health risks of a given business’s workforce. The Times reported the predicament of a woman who faces a near-quintupling of her deductible, though her husband has cystic fibrosis.
Obviously, this creates a potential political opening for Republicans, who could argue that Obamacare is reducing coverage, just as they warned. The bigger political threat may yet come from unions, which fought hard to postpone until 2018 the effective date of the tax and are still not entirely reconciled to it.
Notably, the woman who told the Times that she faces higher health costs is represented by the Service Employees International Union, whose Web site includes a Dick Morris-like warning of “a big shock” for “many workers” in 2018.
The answer to these and other inevitable concerns is not to abandon the Cadillac tax but to improve it. Herring and Lentz suggest tying it to a given plan’s actuarial value, rather than to premiums. That might help avoid their nightmare scenario, in which political pressure forces Congress to enact annual “patches” for the excise tax as it once did for the alternative minimum income tax.
Whatever you think of Obamacare in general, curbing the tax break for gold-plated health insurance is a genuine achievement.
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