Lawmakers Press to Strike a Fatal Blow to the ‘Cadillac Tax’ on Healthcare Plans
Policy + Politics

Lawmakers Press to Strike a Fatal Blow to the ‘Cadillac Tax’ on Healthcare Plans


Republican and Democratic lawmakers are pressing to strike a fatal blow to two controversial tax provisions of the Affordable Care Act. They plan to postpone the effective dates of the so-called “Cadillac tax” on high-end employer provided health insurance plans and the stiff excise tax on the medical device industry until long after President Obama has left office.

The two provisions were designed to raise billions of dollars in operating funds for Obamacare and discourage runaway growth in the cost of the health care system. However, the Cadillac tax has long been the target of an eclectic, bipartisan coalition including conservative Republicans and major labor groups, while the medical devices tax is strongly opposed by lawmakers from Minnesota, Indiana and other states where the medical devices industry employs many workers.

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The Cadillac tax is so unpopular that the Senate voted 90 to 10 last week to repeal it outright as part of a larger bill aimed at dismantling the Affordable Care Act. Both Senate Majority Leader Mitch McConnell (R-KY) and Senate Democratic Leader Harry Reid (D-NV) voted to repeal the tax.

Meanwhile, GOP and Democratic congressional negotiators are struggling to reach agreement on a massive year-end package of spending and tax measures that would avoid a government shutdown. The agreement is likely to include Obamacare tax provisions. Congress is extending a Dec. 11 deadline for completing work on the spending and tax package through the middle of next week.

If Congress votes to impose a two-year delay in beginning to implement the new tax measures, that would be tantamount to killing them outright. While the revenue loss would present added challenges to Obamacare, it would not necessarily jeopardize its long-term viability. But it would mean even higher premiums and deductibles to make up the shortfall.

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Republicans opposed to any tax hike, liberal Democrats and even the AFL-CIO have been working together for months to try to stop the Cadillac tax in its tracks, even though it technically does not begin to take effect until 2018. Republican Sen. Dean Heller of Nevada and Democratic Sen. Martin Heinrich of New Mexico recently introduced the “Middle Class Health Benefits Tax Repeal Act” to target the tax for extinction.

The tax is practically the only element of the Affordable Care Act designed primarily to try to “bend the cost curve” of the U.S. health care system. It would do that by discouraging employers from providing workers with gold-plated health care and dental plans that sometimes encourage unnecessary or excessive spending.

If the tax were allowed to take effect, health plans that cost over $10,200 for an individual or $27,500 for a family plan would be subject to the tax, according to a recent analysis by the Kaiser Family Foundation. The tax is 40 percent of the amount that exceeds those thresholds. As one example, if a family plan costs $30,000, the employer offering the plan would have to pay 40 percent of the $2,500 above the threshold, or $1,000 for each family it covers under that plan.

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Labor groups, the U.S. Chamber of Commerce and others strongly oppose the tax, arguing that it would undercut the quality of health care benefits for American workers and their families. Moreover, it would adversely affect a broad spectrum of plans. In late September, Democratic presidential frontrunner Hillary Clinton urged Congress to repeal the Cadillac tax. She argued, “Too many Americans are [already] struggling to meet the cost of rising deductibles and drug prices,” and that the tax might create an incentive “to substantially lower the value of the benefits package” and shift costs to consumers.”

Yet repealing the Cadillac tax would add directly to the federal budget deficit unless Obamacare is repealed or revised, an estimated $91 billion over the next decade according to the Joint Committee on Taxation. As The Fiscal Times has reported, a group of 101 economists and policy analysts recently sent a letter to top lawmakers on the tax-writing committees of the House and Senate urging them to reconsider proposals for doing away with the tax. Among their concerns: The current tax system, which excludes employer-provided health care plans from taxation, has pressured employers to earmark more of their personnel spending on health benefits than they otherwise would do, to the detriment of their overall operations.

At the same time, lawmakers in both parties have rallied to repeal Obamacare’s 2.3 percent tax on medical devices, which range from simple devices such as medical thermometers, disposable gloves and tongue depressors to advanced devices and computers that assist in conducting medical testing and implants. Industry groups and their allies say the tax is bad for business because it will drive up prices and lead to job losses—especially at smaller companies.

However, opponents of any repeal of the tax cite a report from the Congressional Research Service that found the economic impact of the medical device tax on manufacturers would be “relatively small.”