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Cadillac Tax in the Crosshairs

1 min readBy: Alan Cole

Some Democrats in the House of Representatives are today unveiling legislation that would repeal Obamacare's "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 It was repealed in late 2019 before taking effect. ."

Many have expressed an interest in repealing 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. , but the reasoning given by Rep. Joe Courtney (D-CT) is worth examination: “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. is an unnecessary change that would adversely impact beneficiaries in high-cost areas,” his office said in a release yesterday. The substance of the point is accurate: the Cadillac Tax has a progressive structure, in which a certain amount of health spending is exempt before the 40 percent tax kicks in. This means that people in high-cost-of-living areas will bear the brunt of the tax. It makes sense that a Connecticut representative would bring this forward, given that Connecticut has a high cost of living.

But that critique also applies to progressive income taxes in general, too. As I wrote last year in creating that cost of living map, the substantial regional differences in cost of living also affect federal income tax receipts. It would be fair, then, to ask Rep. Courtney why he (presumably) doesn't oppose progressive income taxes for the same reason.

The Cadillac Tax is certainly not perfect, but there are some good ideas underlying it, and it would better be reformed than repealed. It is an attempt to equalize the treatment of in-kind compensation (benefits purchased by your employer on your behalf) and cash compensation. A better system than the Cadillac Tax would be to treat cash compensation and in-kind compensation completely commensurately, making the tax code neutral with respect to health benefits. Under such a system, people who get insurance through their employer would be treated the same as those who bought their insurance individually. And furthermore, all kinds of compensation would be treated the same.