How Scrapping the Cadillac Tax Will Drive Up Health Care Costs
Policy + Politics

How Scrapping the Cadillac Tax Will Drive Up Health Care Costs

iStockphoto/The Fiscal Times

From Hillary Clinton and Bernie Sanders on the Democratic side to key Republican lawmakers in Washington, including Sen. Dean Heller of Nevada, there is a growing bipartisan push to repeal the so-called “Cadillac Tax” on high-cost health insurance plans that is due to kick in in 2018 under the Affordable Care Act.

The problem is that people who really understand healthcare economics – including those who have supported and those who have opposed Obamacare – say repealing the tax is a terrible idea.

Related: Bipartisan Support Builds to Repeal Obamacare ‘Cadillac Tax’

This week, 101 economists and policy analysts from across the ideological spectrum sent a letter to top lawmakers on the tax-writing committees of both chambers of congress urging them to rethink proposals to do away with it

The Cadillac Tax is a 40 percent excise tax on the health insurance plans that employers provide to their workers. It is paid on each dollar spent on a plan over specified annual maximums – currently $10,200 for individual plans and $27,500 for family plans. It gets its name from the fact that any plan that costs that much is typically a top of the line offering, with low or non-existent deductibles, low co-pay, and few limits on the kind of care individuals can seek.

The current tax system, under which health insurance benefits are not taxable the way ordinary compensation is, has driven employers to channel more of their spending on personnel into health benefits than they otherwise would. And that, the economists argue, is a problem.

“For decades, economists and health policy experts of all political persuasions have agreed that the unlimited exclusion of employer-financed health insurance from income and payroll taxes is economically inefficient and regressive,” they write. “The Affordable Care Act established an excise tax on high-cost health plans (the so-called ‘Cadillac tax’) to address these issues.”

Related: Obamacare’s Cadillac Tax Hits College Campuses

Part of the problem is that when consumers of health care services are unaffected by the cost of the services they seek, they will often consume more than they actually need. They will also be insensitive to pricing, which means that providers can hike their fees with little fear that consumers will take their business elsewhere, or simply stop purchasing what they are selling.

This has the effect of driving up health care costs at the same time that it keeps workers’ compensation lower than it would otherwise be if employers weren’t being offered a tax-free way to raise compensation levels.

The Cadillac tax will help curtail the growth of private health insurance premiums by encouraging employers to limit the costs of plans to the tax-free amount,” the letters signatories write. “The excise tax will discourage the provision of insurance that covers such a large proportion of health care spending that consumers have little incentive to insist on cost-effective care and providers have little incentive to provide it.”

“In addition, they add, “As employers redesign health insurance plans to hold costs within the tax-free amount, cash wages or other fringe benefits will increase. Furthermore, repealing the Cadillac tax would add directly to the federal budget deficit, an estimated $91 billion over the next decade according to the Joint Committee on Taxation.”

Related: Hillary Clinton Is Right – The Obamacare Cadillac Tax Is a Lemon

The letter was distributed by the Center on Budget and Policy Priorities, but was signed by individuals affiliated with more conservative organizations, including the American Enterprise Institute as well as non-partisan organizations, such as the Tax Policy Center.

How much effect it will have is unclear. Repeal of the Cadillac Tax is attractive to conservatives because 1) it’s a tax and 2) it’s part of Obamacare. For Democrats, it’s seen as chipping away at a major tax benefit that is seen as benefiting many workers – even those who don’t benefit from top of the line employer provided health insurance.

What should be clear is that the people who know more about how the tax code and healthcare economics than any lawmaker on Capitol Hill think the Cadillac Tax ought to be allowed to go into effect.