Known as the “Cadillac tax” because it applies to especially generous “Cadillac” health plans, the tax equals 40 percent of the value of private-sector health benefits exceeding $11,200 for single coverage and $30,150 for family coverage in 2022. Albeit indirectly, the tax chips away at one of the largest subsidies in the health-insurance system, the tax exclusion for employer-paid health insurance, which cost $280 billion in 2018. Though it enables companies to provide their workers health insurance and thus undergirds the entire U.S. health-finance system, the tax exclusion also incentivizes consumption, because — other things being equal — the more services a plan covers, the bigger the tax benefit. A wide consensus of economists identifies the tax exclusion as a major source of distortion in the U.S. system, building a higher floor under costs and directing more benefits toward relatively well-to-do households. As economist Victor Fuchs notes in a recent JAMA article, 84 percent of high-income households receive health care via employer-paid insurance, whereas only 35 percent of low- and middle-income households do so.
The Cadillac tax would curb these tendencies, while raising revenue for expanded care for lower-income people. In its latest form, it includes protections for plans with above-average costs because of the demographics of their insured population, for retirees between 55 and 64, and for workers in high-risk professions. In its first year, the tax would affect only about 7 percent of people with employer-sponsored coverage . Yet it is precisely the tax exclusion’s disproportionate benefits for politically active constituencies such as labor unions and upper-middle-class suburbanites that have made it politically difficult to dislodge.
Admittedly, the repeal move has the advantage of political honesty, given Congress’s previous repeated moves to appease the tax’s opponents by “postponing” it. In 2010, President Barack Obama and the Democratic Congress delayed implementation until 2018; it has been delayed twice more in subsequent bills, one signed by Mr. Obama in 2015 and another signed by President Trump in 2018. Though killing the Cadillac tax would increase the projected federal deficit by $168 billion through 2028, according to the Congressional Budget Office, the odds are that it will happen eventually. The United States’ already out-of-whack health-care system will become more so, and bipartisan profligacy and pandering will have triumphed again.