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Cities, States, and Obamacare’s “Cadillac” Tax

2 min readBy: Kyle Pomerleau

Obamacare’s “Cadillac” health insurance 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. is back in the news. Previously, papers were reporting that it was already having an effect on the benefits companies were offering employees. Even though the tax goes into force in 2018, employers are already reducing the value of health plans in order to avoid the coming tax.

This time, the tax is putting similar pressure on state and local governments.

According to a New York Times article, “cities and towns across the country are pushing municipal unions to accept cheaper health benefits in anticipation of the Affordable Care Act that will tax expensive plans starting in 2018.”

The Times reports that New York City is facing this tax. “Caswell F. Holloway IV, deputy mayor for operations, said 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 It was repealed in late 2019 before taking effect. would cost New York City $22 million in 2018, increasing to $549 million in 2022.”

However, unlike businesses, city and state governments cannot just decide to reduce health insurance costs. They have to deal with strong union contracts that dictate health benefits. So in order to reduce the budget costs of the coming Cadillac tax, they will have to negotiate with the unions.

And we saw how politically difficult it was for Scott Walker, the governor of Wisconsin, to pare back benefits for unions in that state.

So it is unclear whether cities will be successful in completely avoiding this tax.

If cities are not able to reduce the health benefits of unions in order to avoid this tax, it will create a substantial cost for taxpayers. For New York City, the $550 million has to come from somewhere. It will likely mean higher taxes in the future for the city.

Of course this was not the intention of 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 health insurance. It was one of the many ways Obamacare was meant to reduce health insurance costs. This tax is meant to push people into less generous health plans. In this way people will face more of the cost of their health care, putting downward pressure on prices.