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A message to my friends and allies about why repealing the Cadillac tax is the wrong thing to do

(Andrew Harrer/Bloomberg)
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This one goes out to my progressive friends, colleagues and allies — to my labor friends, my political allies on all sides of all aisles, and anyone else who generally finds these scribblings agreeable, until I stand up in defense of the Cadillac tax.

You know the one, as I’ve visited the issue twice on these pages, first with a full-throated defense of this important revenue source for the Affordable Care Act, and second, having read many of your arguments against the tax, a 3/4’s-throated defense. The fact is, you make some strong points against the tax. But read on, as you may find I’ve got even stronger ones, especially given the reality of tax policy today and some ideas for compromise.

As you know, the Cadillac tax, which takes effect in 2018, is a 40 percent excise tax on the value of insurance premiums over a threshold of $10,200 for self-coverage and $27,500 for family plans. It is expected to raise about $90 billion over 10 years to support the ACA, and much more after that. Here are some of your most pointed objections to it:

— Yes, the tax exclusion — the fact that health benefits are treated more favorably than wages — leads to wasteful spending on health coverage; but the Cadillac tax doesn’t just hit such “excess” care; it discourages necessary care that many won’t be able to afford once it causes employers to increase out-of-pocket costs or impose high deductibles.

— Those of us in unions traded away wage increases for these valuable plans, which looked like a fair trade-off at the time. Put this tax in the mix and that trade-off looks a lot less favorable.

— And please don’t try to serenade me with your economic theory about how if we traded wages for benefits back then, we’re going to get back wages when we give up benefits now. Won’t happen.

— Even if it did, health benefits get the tax exclusion while wages do not, so even if the pretax trade-off were dollar-for-dollar, the post-tax trade-off would be less than that.

Counterarguments exist, and I’ll get to them. Some are stronger than others — your trade-off points are well taken. But here’s the fact that I fear you are seriously overlooking: the Cadillac tax isn’t perfect — no tax is. But it is on the books, and if you repeal it, you will not be able to replace it.

I realize that’s a political prediction but I am confident that it is correct. Instead, you will be joining forces with those trying to kill Obamacare in repealing one of its important revenue sources. If you want the ACA to continue to grow, flourish, and solidly cement its place in the firmament of public policies that, because they solve big market failures, are treasured by large majorities, then you cannot in good faith support repeal of a key funding source unless you can replace it with a better one, which I’m certain you cannot.

This political point is perhaps made more salient when you consider some counterarguments to your objections. Your concern that the tax will take too large a bite out of necessary, versus excessive, care does not square with either my own analysis or that of the Treasury’s Office of Tax analysis. They estimate that the plans of only 4 percent of those with employer coverage will surpass the thresholds in 2018. More importantly, since what matters is not whether your plan is subject to the tax but how much in terms of dollars would be hit by it, Treasury estimates that only 1 percent of plan costs will be over the thresholds that year, and that assumes employers do nothing to avoid this outcome. That share will grow, but stick with me, because that may be an area where we can find some compromise.

There’s also reason to believe that imposing cost-sharing on employees won’t be the only way employers lower premium costs to avoid the tax. They’ll have an incentive they currently lack to negotiate for lower costs and to tap rising efficiencies like bundled payments and related models of care coordination that pay for quality over quantity.

You also challenge the assumption that what employers used to put into your health plans, they’ll now put into your paycheck. My read of the evidence is that over the long term, this assumption is valid, even if it isn’t dollar for dollar, but (a) the long-term could be far away, and you and I both have long worried about wage stagnation, and (b) this result is less likely to hold in slack labor markets.

I agree. But you know that the goal of my work is to get to full employment and thus boost the bargaining power of middle and low-wage workers. Surely, this is a primary goal for both of us, regardless of the outcome of this debate. With the Caddy tax in place, achieving our full employment goal is even more urgent. Repealing the tax won’t change that, but it will, by undermining the viability of the ACA, strike a blow at job quality, as millions of working people could end up with less affordable access to coverage.

Finally, my political point — if you repeal, you won’t replace — gets even stronger if we begin to consider some compromises. The thresholds are already set to adjust for plans that are more expensive due to age, gender, high-risk industries and occupations, and numbers of retirees.

That leaves out another significant source of price variation: geography. Suppose the thresholds also were adjusted to kick in at higher levels in parts of the country with higher health care costs and at lower levels in places with lower costs (keyed off of some standard plan so we’d know we’re adjusting for price, not quality, differences). Also, if it turns out that over the long run, indexing the thresholds to the Consumer Price Index (as in current law) leads to a situation wherein affordable, quality access is compromised, we should index to a different measure that will thereafter avoid this outcome.

That might cut into the revenue projections but it would still be the right thing to do.

Look, in sharp distinction to the ideologically motivated enemies of Obamacare, we share the same goal: affordable, quality health care that squeezes the unsustainable, wasteful inefficiencies out of our uniquely expensive U.S. system. If it turns out that the Cadillac tax undermines that goal, then I will work with you to change that. I’m confident that won’t be the case, especially if we make further adjustments to the thresholds.

But if our support for the ACA is split at this critical stage of its evolution, it will be dealt a serious blow. Let’s work together to make sure that doesn’t happen.