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Opinion ‘Cadillac tax’ portion of Affordable Care Act is the next target

A supporter of the Affordable Care Act after the U.S. Supreme Court ruled to save the law. (Andrew Harrer/Bloomberg)

THE AFFORDABLE Care Act served dessert first, offering subsidized health coverage across the country before some of its less popular provisions were scheduled to take effect. But the government soon will start asking the country to eat its vegetables as cost-control measures phase in — and a lot of powerful lobbies are going to fight back.

A formidable alliance has formed against one of the government's best policies that few want to defend: The ACA's so-called Cadillac tax, a provision scheduled to take effect in 2018 that is meant to whittle down overly generous employer health-care plans. The Kaiser Family Foundation reported last week that a quarter of employers will have at least one plan that could be subject to steep taxes in 2018, and barring changed policies that share will increase with time. In anticipation, companies will look for ways to pare benefits or otherwise reduce costs. Though many employees will see other forms of compensation, such as taxable wages, go up to offset reductions in health-care benefits, unions, insurers, chambers of commerce and other interests will resist reduction in the subsidies they benefit from.

Congress should ignore their complaints. The federal government has allowed companies for decades to offer employees tax-free compensation in the form of health-care benefits. This costs the government huge amounts of money in foregone tax revenue. Moreover, if you subsidize something, such as health-care spending, you get more of it, regardless of whether it’s the most rational form of compensation. Government policy, then, actively encourages overspending on health care and underspending on, say, wages. The Cadillac tax is the ACA’s way of dealing with this problem, which has only grown more pronounced over the decades as health-care spending outstripped inflation.

It would have been better to eliminate the government’s tax preference for employer-sponsored health-care plans. But that was politically impossible. Instead, Congress effectively set a limit on the size of the tax subsidy it’s willing to offer employer health-care plans and indexed it to inflation. Generous plans that exceed that limit will be taxed at higher rates. If health-care costs increase more quickly than inflation, more plans may be hit with the Cadillac tax later on. This imposes some much-needed discipline on employer-sponsored health plans, discouraging rapid increases in health-care costs.

Democrats seeking to scale back or scrap the tax must explain how they could possibly replace the revenue it would raise to pay for the rest of the ACA. The bill for repealing it would run $87 billion over 10 years. Free market-oriented Republicans, meanwhile, must explain their defense of this government preference for a certain kind of employee compensation. Moreover, both sides claim they want to restrain ever-rising health-care spending; no one could possibly take those assertions seriously if they undercut one of the only policies on the books designed to do just that — right as it's about to start working.

We hope President Obama will offer a stout defense. He no longer needs to court unions, and he is well-positioned to call out pro-repeal Republicans for their ideological hypocrisy. The tax does not really kick in until he is out of office, but it is a key component of his legacy achievement.

Read more on this issue:

Ezekiel J. Emanuel: Why Republicans’ health-care plans are bad deals for Americans

Walter Dellinger: House Republicans’ misguided Obamacare lawsuit

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