Can America Afford Obamacare's Cadillac Tax?

With Tax Day and Tax Freedom Day being over, one would think that the time for dealing with taxes is done. It isn't, at least in Congress. Apparently, there is a provision in the Affordable Care Act (ACA), better known as Obamacare, that is so bad that the Democrats just introduced a bill to repeal it. What can be that bad? The Cadillac tax.

The Cadillac tax is an ACA-induced excise tax that is supposed to take into effect in 2018. The excise tax is a 40 percent tax targeted at employer-based health insurance premiums that exceed $10,200 for individuals and $27,500 for families. By taxing high-cost health care plans, the goals of the Cadillac tax are to curtail health care spending growth while financing the recent expansion of health care coverage. Are those goals being met?

Well.....one of the advantages is that the Cadillac tax is supposed to add $85B to the federal revenue between 2016 and 2025, according to the Congressional Budget Office (CBO). CBO budgetary projections tend to be rosy, so it's not surprising that just months earlier, the CBO estimated the generated tax revenue to be at $149B, which is a $67B difference. While $85B is a lot of cash for us mere mortals, this is but drops in the bucket for the federal government. First, $85B over 10 years is still $8.5B per annum. Second, and even more noteworthy, is that Obamacare is going to cost the American people $1,707B. Last time I checked, $85B < $1,707B, so people shouldn't even bother making the fiscal solvency argument here. Also, isn't it nice to be reminded that Obamacare is going to cost much more than the $900B Obama promised back in 2009? The threshold for the tax is only set to increase by the Consumer Price Index (CPI) + 1 percent, which is to say that the Cadillac tax will cover more plans over time because of the high health care inflation.

At least it's cutting health care costs? With a 40 percent tax, you think that would be enough of an incentive to cut back on health care consumption, right? It very well might. But to quote Thomas Fiery over at the Cato Institute:

"To be sure, the public worries about the rising cost of health care. But that doesn't mean that we should embrace any policy that lower that cost; otherwise, we would simply outlaw surgery and cancer treatments. Instead, what people want is to pay no more than they have to for the health care they want. Put more carefully, people want greater efficiency in health care (that is, more bang for their buck), not a cap or threshold tax on the care they receive."

A better question we should ask ourselves is if it even matters if the Cadillac tax raises tax revenue or curtails health care spending. And let's forget tax code complexities for a moment. If there is a 40 percent tax on what the government perceives to be ridiculously high premiums, then you better believe employers are going to react negatively. The tax is assessed on the overall value of health care benefits involved, which will hit both employee and employer contributions. As the Economic Policy Institute brings up, premiums are not just affected by the cost of a procedure, but also age of the workforce and size of the firm. Or to refer to the American Enterprise Institute, the tax's regressive nature is poorly targeting middle-class and poor individuals whose plans aren't necessarily exorbitant. The CBO predicted that the end-result will be higher deductibles and/or employers no longer contributing to health and flexible spending accounts. The American Health Policy Institute (AHPI) also found that in 2018 to 2024, 12.1 million employees would either experience an average of $1,050 increase in payroll taxes or a $6,150 decrease in health care benefits. As for the increased threshold I mentioned earlier, AHPI predicts that by 2031, it will cause the average family health care plan to hit that threshold.

The Committee for a Responsible Federal Budget lauds the Cadillac tax because it's an indirect way of dealing with the issues of employer-based health insurance. If you want to deal with the problems of employer-based health insurance, how about trying to deal with it more directly? As I brought up a couple of weeks ago, employer-based health insurance is the worst tax break this country has to offer.  Enact health care vouchers, cap the tax exclusion (see here, here, here, and here), create need-adjusted tax credits (Miller, p. 16), create more neutrality by allowing out-of-pocket health care expenses and individual insurance to be tax deductible, or eliminate the tax exclusion all together and enact a paid-claims tax (Bipartisan Policy Center, p. 77-82). Instead of attempting to solve a problem by causing an arguably even bigger problem, how about getting at the root of the problem by taking the bull by the horns?


9-13-2015 Addendum: An interesting libertarian argument on why we should keep the Cadillac tax intact, at least until we can remove the employer-sponsored health insurance tax break.

10-6-2015 Addendum: Charles Blahous [at the Manhattan Institute] makes an interesting argument similar to the one in the previous addendum. Essentially, the optimal thing to do would be to remove both employer-sponsored health insurance and the Cadillac tax. However, as long as employer-sponsored health insurance is still intact, it's better to have the Cadillac tax than not having the Cadillac tax.