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The Obamacare Cadillac Tax and its Mixed Bag of Consequences

2 min readBy: Jordan Yahiro

Both employers and unions across the nation have continued to realize the burdens of Obamacare. A recent survey of 360 large employers has shown business leaders’ discomfort with many provisions of the Affordable Care Act as well as their uncertainty about the future of the employer-driven health insurance system.

One out of three employers surveyed are considering moving to a defined contributions strategy, signaling discontent with ACA provisions that expand access to the health care system while bringing little benefit and limiting employer flexibility.

Among the top five provisions that make employers squeamish is 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 It was repealed in late 2019 before taking effect. ” on high cost health insurance plans. Beginning in 2018, an excise 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. of 40 cents of every dollar above a certain threshold of employer-provided health insurance will be imposed. Individual plans and family plans will face thresholds of $10,200 and $27,500, respectively. For example, a tax of $320 would be levied on an individual’s plan worth $11,000.

Beyond raising $80 billion in revenue to offset a fraction of the cost of Obamacare, the tax seeks to contain health costs and reduce health spending. And it may indeed do so, but in an unnecessarily convoluted manner. The tax will actually be inequitable due to certain factors that influence the price of insurance.

Since 1918, employer-provided health insurance has been allowed to be deducted from taxable personal income. In turn, employers have been incentivized to compensate workers with smaller salaries and larger health insurance benefits. Besides decreasing income tax collections, the generous plans encourage policyholders to spend more than they need to on health care, thereby driving up its price.

This outcome is undesirable and could be remedied by simply eliminating the tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit (EITC), child tax credit (CTC), deduction for employer health-care contributions, and tax-advantaged savings plans. on health insurance and lowering the tax rate. 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. instead arbitrarily targets expensive premiums, achieving a similar result but with collateral damage to high-risk individuals and individuals in certain regions of the country. Simply put, the cost to insure an individual’s health is largely determined by his or her risk profile. Therefore, some individuals face higher premiums just because of age or health status, and imposing a tax on expensive plans will inequitably affect some of these individuals and families. Secondly, the price of health insurance can differ between regions because of cost of living factors, potentially to the extent that only one out of two identical plans (with different prices) will be taxed.

Although the excise tax may have a theoretical net benefit, scaling back the current tax expenditure on employer-provided health insurance and lowering the tax rate would end up being the fairest, least distortionary way to raise revenue and contain health care costs.