The House is scheduled to vote Wednesday to repeal the 2010 Affordable Care Act’s Cadillac tax on generous employer-sponsored health insurance (ESI). The bill, which has more than 350 cosponsors, will pass. While health and tax economists generally love the excise tax, lawmakers of both parties--and many of their constituents--don’t.
On one hand, the fate of the tax hardly matters since it never has taken effect and is not likely to do so anytime soon. Indeed, Congress already has delayed implementation—twice. It was supposed to take effect last year. Now, that won’t happen before 2022—a political lifetime from now.
The provision is structured as a 40 percent excise tax on employers. CBO estimates they will apply to plans with a value of $11,200 for individuals and $30,100 for families if the law takes effect as scheduled in 2022 (and increase with inflation thereafter).
Acknowledging the cost
The Joint Committee on Taxation says repealing the law would lose Treasury $193 billion between 2022 and 2029. But would killing a tax that almost certainly was never going to take effect add to the deficit? In a sense, Congress did that damage when it passed the ACA a decade ago. Repealing the tax merely acknowledges it.
The Kaiser Family Foundation estimates that in 2022, about one-in five employers offering health benefits will have at least one plan that exceeds the Cadillac tax threshold. Including Flexible Savings Account (FSA) contributions, about one-third would be subject to the tax, at least for some employees.
By 2030, about 37 percent of firms that offer insurance would be hit by the tax. Including FSAs, nearly half would have some plans above the threshold.
Twin benefits
The share of workers effected by the tax would be much lower. CBO projects that 15 percent of workers with job-based insurance would be effected in 2022, rising to 25 percent by 2028.
In theory, the law has two benefits. The first is to raise revenue to help pay for ACA, including its health exchange subsidies and the expansion of Medicaid. The second is to reduce incentives for excessive health spending. This might happen by firms raising deductibles, directly negotiating lower payments to providers, shifting workers to managed care plans, or narrowing provider networks in fee-for-service insurance. Economists loved that part.
Few others did, though. Employers, who offer health coverage to recruit workers in today’s tight labor markets, want to keep relatively generous insurance. So do many unions that collectively bargained for rich health coverage. And the workers who benefit from tax-subsidized employer insurance are not anxious to lose it.
Are workers underinsured?
But, perhaps partially in response to the coming tax, employer plans many not be as generous as they once were. Stan Dorn of the advocacy group Families USA, makes this argument. Taxing overly-generous ESI, he says, is an effort to fix a problem that no longer exists.
Stan argues that while employer plans may have been overly generous a decade ago, they no longer are as deductibles and copays have steadily increased. Since 2008, he says, average deductibles for employer coverage have more than doubled. And from 2005-2018, the share of ESI enrollees classified by the Commonwealth Fund as “underinsured” grew from 12% in 2005 to 28%.
Kill it or fix it?
But are these changes an argument for killing the tax, or fixing it?
Some analysts, such Paul Van de Water of the Center for Budget and Policy Priorities, argue that concerns about poor job-based insurance are overstated. And he notes that while average out-of-pocket medical costs may have increased, some plans (those most likely to be subject to the tax) remain very generous. He suggests fixing any problems by reworking the thresholds for the tax and making some other changes that were first proposed by President Obama.
A couple of years ago, my Urban Institute colleagues Linda Blumberg and Steve Zuckerman, along with Henry Aaron of the Brookings Institution and Paul Ginsburg of University of Southern California and Brookings, described their preferred rewrite.
Aiming higher
Among their suggestions: Refining the tax thresholds and using some of the revenues to subsidize rising out-of-pocket employee costs. Most important, they proposed replacing the excise tax on employers with a cap on the individual income tax exclusion for ESI. In effect, workers subject to the cap would pay the same tax on extra insurance as they do on a comparable amount of wages. Analysts such as CBPP’s Van de Water and Alan Viard at the American Enterprise Institute also favor such a plan.
This, of course, was what some supporters of the ACA wanted to do in the first place. But to reduce the political fallout, they turned a direct tax on some workers into an indirect levy by taxing their employers.
It is hardly likely that Congress is going to roll back the ESI exclusion any time soon. After all, if it wanted to, it could have done so in the 2017 Tax Cuts and Jobs Act and used the revenue to further reduce individual income tax rates. But while such a swap should have been appealing to many Republicans, it never generated any attention from the tax writers.
It should also be attractive to Democrats, who would help fund Medicare for all by shrinking the ESI exclusion. How? If government insurance replaces employer coverage, the ESI tax break will disappear. Yet, it is instructive that while this trade is implied by Medicare for all, few Democrats want to say it out loud.
The political challenges of saving the Cadillac tax are real. Still, instead of simply scrapping the tax, Congress ought to think about rebuilding its chassis.
