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Cadillac Tax Confirms: Employers Respond to Tax Changes

1 min readBy: Alan Cole

A report from the consulting firm Mercer, which surveyed 700 employers, found that 62% of those employers are concerned about being hit with the excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on high-cost health plans, also known as the “Cadillac TaxThe Cadillac Tax is a 40 percent tax on employer-sponsored health care coverage that exceeds a certain value. The aim: to curb health-care cost growth, reduce favorable tax treatment of employer-provided insurance, and help fund the Affordable Care Act (ACA). It was repealed in late 2019 before taking effect. .” According to the report, many companies are already making changes in anticipation of the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. , converting to less generous plans.

In other words, the Cadillac Tax – which institutes a 40% excise tax on plans above a certain threshold – continues to work as designed. As the Obama administration correctly argued, the Cadillac Tax will slow the growth of high-cost health plans. To some extent, it repairs a distortion where health benefits were favored over other sorts of compensation – though its design is far from ideal.

Taxing something gets you less of it. This basic principle remains true for almost any good imaginable. Elasticity is a real thing. When you hear someone argue that his proposed tax changes will not affect people’s behavior, you should immediately be skeptical. Taxes on labor reduce the supply of labor. Taxes on investment reduce investment. Taxes on saving reduce saving.

Instead of consistently acknowledging this truth, politicians only use its logic when they are trying to influence people’s behavior. They only acknowledge people’s ability to respond when that is the intent behind the tax. But people respond to taxes, whether you intend it or not. Even if you don’t intend to reduce labor or investment, taxing labor or investment will have those drawbacks.