This story has been updated.
To economists, the Cadillac tax on health insurance is a linchpin of Obamacare – the provision of the law that at long last seeks to fix a World War II era tax loophole that economists have for decades argued has made health care a tremendously inefficient market and helped drive up spending. To pretty much everyone else -- Republicans, Democrats, labor unions, big employers -- it's just got to go.
With the tax under siege from all sides, as Democratic presidential candidates Hillary Rodham Clinton and Bernie Sanders add to the chorus calling for its repeal, a group of 101 economists from both sides of the aisle sent a letter to Congressional leaders Thursday making an impassioned case for the law.
"We, the undersigned health economists and policy analysts, hold widely varying views on other provisionsof the Affordable Care Act," the economists wrote. "But, we unite in urging Congress to take no action to weaken, delay, or reduce the Cadillac tax until and unless it enacts an alternative tax change that would more effectively curtail cost growth."
The Cadillac tax, set to go in to effect in 2018, will mean that companies will either pay a 40 percent tax if their plans are over a certain limit (which is $10,200 for an individual and $27,500 for a family) or cut their plans and shift more of the cost of health care on to employees.
The Cadillac tax, the economists argue, will increase wages and other fringe benefits as employers shift away from compensating employees through overly generous insurance that spurs overuse of the health care system and drives up spending. It will bring in an estimated $91 billion to the federal government over the next decade. It could also nudge health care more toward functioning like a normal marketplace, with companies competing to provide better quality service and not just increasing amounts of care.
"The so called Cadillac tax is about the only thing in the bill I liked," said Robert Helms, an economist and resident scholar with the American Enterprise Institute, who said he was not asked to sign the letter. "I’d hate to see them repeal it."
Henry Aaron, an economist at the Brookings Institution, said that the Affordable Care Act is an unquestionable success. He also agrees that the tax is a good thing.
"The view among economists has been pretty much bipartisan," Aaron said. "The purpose of insurance is to cover costs that pose undue hardships; you need to provide financial protection so that health care costs are not ruinous for people and it doesn't obstruct people from getting needed care. But insurance isn't meant to pay every single bill."
The problem is that the tax doesn't sound good to just about anyone else.
Its many opponents, an unusual collection of political bedfellows that have coalesced in a group called The Alliance to Fight the 40, argue that the tax will hurt average Americans. They say it will penalize employers with higher health care costs due to having disabled workers or premature babies, or punish employers operating in specific industries or geographic areas where health insurance is expensive. It punishes companies for costs, they say, they are powerless to control.
But economists, who have been objecting to the unlimited exclusion of health benefits from taxation for decades, see it as a necessary, if unpopular, step toward controlling health care spending. Aaron said that as far back as 40 years ago, the influential economist, Martin Feldstein, wrote a chapter in his doctoral dissertation that examined how the the policy had led to the purchase of an excessive amount of insurance. That, in turn, helps drive rising health care expenditures.
The system is set up to create "moral hazard," Aaron explained. That means by reducing the price that people pay for health care, the current system encourages people to consume more of something that has less value than it costs.
As far back as the Reagan administration, Aaron said, there were serious proposals to try and do something about the open-ended health benefits exclusion -- which withered.
"The argument is, I think, pretty uncontroversial among most economists, but the practical question and the political question has been to impose such limits in a way that was politically acceptable," Aaron said.
Helms has traced the history of the exclusion of health insurance from taxes to World War II, when wage controls were in place and employers would increase fringe benefits to reward workers. Back then, health spending wasn't a big fraction of the economy and few people had health insurance. The exclusion of health care benefits from taxation pushed insurance into the employer market, unlike almost every other kind of insurance -- auto, fire, life. The Internal Revenue Service decided to treat health insurance as taxable in the early 1950s, but Congress stepped in to reverse that decision, Helms said.
The tax on employers isn't economists' first choice when thinking about solutions. Many would prefer an individual tax cap on the health insurance exclusion, where the value of health insurance over a certain amount would be taxed as income at the person's marginal tax rate. But Aaron pointed out how tricky an individual cap would be to design, since health care costs go up as people get older and what people spend on health care can vary by geography. But even though many economists think the Cadillac tax may be a "second-best" solution, they see it as a critical step toward bringing down health care spending.
The talking points of the Alliance to Fight the 40, a coalition of opposition to the tax, include that it will force employers to scale back health benefits. To economists, that's part of the point.
"That, to me, is mostly a good thing, because it gives a very strong incentive for both unions and employers and workers to agree on trying to reduce the cost of insurance, and what that would do in a competitive insurance market is create very strong incentives for insurance companies to compete more on the basis of value and quality and cost-effectiveness, as opposed to just adding benefits," Helms said.
A recent poll by the Kaiser Family Foundation sums up the complicated situation, showing that how people feel about the Cadillac tax depends on how it is framed. People who oppose it and are told it will cut health care spending tilt in favor. Those who favor it and hear employees will pay more are persuaded to oppose it.
Economists know they're up against strong political opposition, that not everyone sees the current system as "economically inefficient and regressive," as they describe in their letter. Helms has a favorite quote that sums it up.
Two decades ago, Clark C. Havighurst, a professor emeritus at Duke University School of Law may have said it best: limiting the health care tax exclusion was "a notion that only a policy wonk could love, a meritorious policy idea with no natural political constituency."