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Cadillac Tax

The 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 It was repealed in late 2019 before taking effect.

How Does the Cadillac Tax Work?

The Cadillac tax equals 40 percent of health insurance benefits surpassing certain dollar thresholds for both individuals and families. In 2022, when the tax was scheduled to take effect for the first time, the tax would have applied to every dollar of health insurance benefits exceeding $11,200 for single person coverage and $30,150 for family coverage. Employers would have been required to calculate the Cadillac Tax owed for each employee’s employer-sponsored coverage.

Effects of Implementing the Cadillac Tax

Under current tax law, employer-paid health insurance premiums are excluded from an employee’s gross income even though employers can deduct these payments as business expenses. This exclusion is the tax code’s largest tax expenditure, reducing federal revenue by almost $3 trillion between 2019-2028. The Cadillac Tax placed a functional limit on the employer-sponsored insurance (ESI) exclusion, which limits the incentive for employers to provide compensation in the form of health insurance benefits rather than taxable wages.

The tax would likely curb the growing cost of health care by increasing the cost of high-cost health insurance plans. All else equal, consumers would demand less when the price increases, thereby reducing the amount of health insurance provided by employers and reducing health-care service consumption. This would help to reduce the cost of health care. The tax would also generate revenue from mostly higher-income taxpayers.

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