Hillary Clinton has officially joined the hue and cry for repealing the “Cadillac tax,” a controversial but important Obamacare provision slated to take effect in 2018.
Despite the cutesy vehicular nickname, this tax is actually on high-cost health insurance plans (those costing at least $10,200 for a single person and $27,500 for families). It’s no wonder that Clinton, like other poll-sensitive or perhaps misguided politicians, has come out against it: This tax, like so many other taxes, has proved hugely unpopular, repelling an unholy alliance of unions, businesses and the public at large.
Pretty much the only people who want the tax to go forward as planned are economists. Which seems likely to make voters hate it even more.
But here’s a fun fact that might help turn the tide: This tax would probably help you get a raise.
How, exactly? The chain reaction between Cadillac taxes and your paycheck is a little complicated and not terribly intuitive.
It all comes down to the fact that, for decades, Congress has been encouraging your employer to give you a dollar more of health insurance rather than a dollar more of wages whenever possible.
If your employer pays you in cash, that cash gets taxed. If your employer compensates you with stock options that turn out to be worth something, those also get taxed. Likewise with a house or a BMW or any other in-kind compensation. Likewise with retirement benefits.
But, due partly to a historical accident involving World War II wage controls, this isn’t the case for health insurance. No matter how much health insurance your employer gives you, it’s effectively offered at a discount relative to almost any other form of compensation because it’s not considered taxable income.
This means there’s a pretty good chance your employer is paying you more in health insurance, and less in other forms of compensation (like, say, wages), than he or she would absent this inducement.
This tax break has had three not-so-great unintended consequences.
First, it costs the government hundreds of billions of dollars each year, compared with how much Uncle Sam would collect if employers paid workers in cash what they’re paying out in health benefits. The tax break also happens to disproportionately benefit higher-income people, who are more likely to both have generous health plans and to pay higher marginal income tax rates.
Second, an open-ended subsidy for health care encourages you — and me, and everyone else who gets employer-sponsored insurance — to use more health care. Particularly since more generous health plans often mean low deductibles and co-pays.
Why think twice about going to the doctor if it only costs $10 out of pocket? And why second-guess a $500 test even though it seems unnecessary? You may not pay a dime of that $500. Well, at least not today; that unnecessary $500 test, like all the unnecessary $500 tests your co-workers agree to, will get quietly baked into next year’s insurance premium.
Not that your boss cares so much if your premium rises. That premium, as we’ve learned, is tax-advantaged, and your boss can just take it out of the raise you might have received instead.
So the third perverse consequence of this tax break is that it cuts into your wages, both in the initial compensation package offered when you accept a job, and over time as rising insurance premiums quietly displace your wage gains.
Happily, compared with other factors contributing to our broken health-care system and its spiraling costs, this tax distortion is relatively fixable.
In an ideal world, we would probably eliminate the health-insurance exclusion altogether. That’s proven politically toxic, though, so the next-best thing is this Cadillac tax, which is just a Rube Goldberg machine-like way of capping the subsidy.
Employers are already taking steps to hold down the costs of their health plans to avoid triggering the Cadillac tax, even though it doesn’t kick in until 2018. These kinds of measures have probably helped slow the increase of health-care costs and should eventually free up money for the wage gains workers desperately need.
It’s tempting for the general public — and the politicians who want their votes — to automatically reject any new taxes. But don’t think of this as a new tax. Think of it as a partial fix to an old, expensive, regressive loophole that’s been sneakily raising the price of your doctor visits and stealing your wages.