The ‘Cadillac Tax’ isn’t about revenue

Republicans have long waited to get an Obamacare repeal bill on the president’s desk. Well that’s finally happened. The bill, repealing “core pillars” of the law, won’t pass a veto. But Republicans may still pursue incremental changes, including gutting the Affordable Care Act’s only cost-controlling provision, the so-called “Cadillac Tax.” Doing so would be a mistake.

This was a long time coming. Just last month, Sen. Harry Reid (D-Nev.), and Rep. Nancy Pelosi (D-Calif.) were starting to pull together a coalition to stop the tax. More recently, a bipartisan coalition requested a meeting with President Obama to discuss repeal of the tax before the year’s end, possibly as part of the annual “tax extenders.”

{mosads}The Cadillac Tax – a 40 percent excise tax beginning in 2018 – affects the value of employer-sponsored health plans over $10,200 for individual coverage and $27,500 for family coverage. So take a family of four with a plan costing $30,000. The family would pay a 40 percent tax on $2,500, the difference between the plan’s cost and the $27,500 threshold. The Kaiser Family Foundation estimates a quarter of employers will be hit by the Cadillac Tax in some way.

So why would anyone defend the Cadillac Tax? This would, in the words of then-candidate Obama, tax employer health benefits for the first time.  

What critics miss is that the goal of the Cadillac Tax is to slow growth in healthcare costs. Since longstanding government policies give employers a tax break for offering healthcare benefits, businesses are encouraged to overinvest in providing generous benefits to employees. That means patients are less likely to seek out lower-cost care on their own, giving providers more room to raise prices.

The Cadillac Tax is more comparable to so-called “sin taxes” on things like cigarettes and alcohol: Getting some revenue out of it is nice – and helps pay for the $1.6 trillion in new spending on exchange subsidies and Medicaid expansion – but you really know it’s working when the revenues start declining.

This is where congressional Democrats, and Democrat candidates like Sen. Bernie Sanders (I-Vt.), are trying to pull the wool over everyone’s eyes: By treating the tax as a revenue generator. Just a few months ago, Sanders introduced legislation to repeal the Cadillac Tax, suggesting the “repeal be paid for” by instituting a financial transactions tax.

Some Republicans are also going after the tax. Earlier this year, a bill to repeal the tax made it to the House Ways and Means Committee co-sponsored by over 100 Republicans.

What’s most troubling about these efforts isn’t a loss of revenue; it’s that we might lose the only element of the ACA that has any bite when it comes to health care costs. Researchers at the Johns Hopkins School of Public Health estimated that the Cadillac Tax would reduce private health benefits by 3 percent 10 years after implementation. While that might sound like a bad thing, other research has found that this would be replaced dollar for dollar with wage increases. Moreover, this would begin to reduce health care cost growth, which has become an ever-growing share of consumers’ paychecks. Just the threat of the Cadillac Tax has already encouraged businesses to move to different health insurance arrangements, offering higher deductible plans and moving to new models like private health insurance exchanges.

Reid and Pelosi’s repeal efforts present a chance for Republicans to call out Democrat leadership for selling out America’s taxpayers to appease unions and big business – unions being among the biggest opponents of the Cadillac Tax because their plans will be among the first hit.

Yet the Cadillac Tax, despite its merits, is very imperfect. As I’ve written elsewhere, the tax is undoubtedly regressive. In effect, it applies the highest income tax rate in the country to everyone – janitors and CEOs alike. Republicans interested in reform should turn to a solution favored by most health economists: capping the value of the tax exclusion. This would still allow employers to deduct the value of health insurance up to a point, taxing it as ordinary income afterwards. Doing so would only impose standard income tax rates over whatever threshold is created. In fact, this would amount to a tax cut for the middle class.

Republicans should not allow Democrats to direct the debate over the only cost-control in the ACA. In doing so, they run the risk of bailing out unions and special interests at the expense of the American taxpayer. 

Feyman is a fellow and deputy director of health policy at the Manhattan Institute.