VII. Key Issues: Regulation & Reform >> C. Health Reform >> Affordable Care Act (ACA) >> ACA and Households >> ACA and Taxes >> Excise Tax on Comprehensive Health Insurance Plans (Cadillac Tax) (last updated 9.6.17)
- 1 Overview
- 2 Revenue Generation
- 3 Potential Impact on Health Spending
- 4 Number of Affected Workers
- 5 Impact on Workers and Firms
- 6 Delay of the Excise Tax until 2020
- 7 Repeal Initiatives
- 8 Research and Analysis
- 9 History of the Excise Tax
- 10 General Resources
Summary. The ACA’s Excise Tax on Comprehensive Health Insurance Plans (aka “Cadillac Tax”) is an excise tax on employers who offer high-premium healthcare plans. When the tax goes into effect, employers will be required to pay a 40 percent tax on the “excess benefit” of each healthcare plan – the portion of the premium that exceeds $10,200 for individuals and $27,500 for families. These thresholds are set to rise with overall inflation, rather than healthcare inflation, so more and more healthcare plans will be subject to the Cadillac Tax over time. It was created to achieve two policy goals of the Obama administration: a) to provide revenue to offset ACA expenditures; b) to motivate Americans with employer-sponsored insurance to consume less health care, thereby reducing national health expenditures. The Cadillac tax represents an indirect attempt to limit or eliminate distortions created by long-standing tax subsidies for company-offered health insurance arising from the “Employer Tax Exclusion.”
- Originally planned to begin in 2018 (the tax is now delayed until 2020), this tax is levied on insurance policies whose premiums exceed $10,200 for an individual and $27,500 for a family. A higher threshold ($11,500 single/$29,450 family) is used for early retirees and high-risk professions.
- These thresholds increase annually at a very low rate of inflation (CPI) + 1% in 2018 and 2019, and CPI only thereafter
Less than twenty-five percent of the Cadillac tax revenue is expected to accrue from the forty percent excise tax itself, as companies are predicted to devalue insurance policies to fall below the threshold. The bulk of federal receipts is projected to result from income and payroll taxation of increased worker pay. Wage gains are predicted to result as employers are forced to trim or eliminate health benefits. This hypothesis was also advanced by MIT professor Jonathan Gruber during the 1993-1994 debate over health reform under President Clinton.
Wage-Benefit Tradeoffs Theory
See Who Pays for Employer-Provided Insurance for information on the wage-benefits trade-off (or compensating wages differentials) theory and empirical studies on the topic. This section only addresses commentary on the theory as related to the ACA.
Advocates of the Wage-Benefits Trade-off Assumption
- Federal Agencies
- CEA (October 2015). Remarks by Jason Furman, Chairman of the Council of Economic Advisers. Next Steps for Health Care Reform, The Hamilton Project (10.7.15). “Economic theory implies that the money employers save on health benefit costs as a result of the tax will be passed through to workers as higher wages in the long run. The theory that employers will pass on health benefit savings in the form of higher wages has received empirical support, and undergirds CBO and Joint Committee on Taxation (JCT) analyses of the budgetary effects of the excise tax. Simple calculations based on CBO/JCT estimates imply that the tax will increase take-home pay by $45 billion per year by 2025.”
- CBO (April 2014). Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act, April 2014. “Because of the net reduction in employment-based coverage, the share of workers’ pay that takes the form of nontaxable benefits (such as health insurance premiums) will be smaller—and the share that takes the form of taxable wages will be larger—than would otherwise have been the case” (p. 13).
- CRS (August 2015). Jane Gravelle. The Excise Tax on High-Cost Employer-Sponsored Health Insurance: Estimated Economic and Market Effects. Congressional Research Service (8.20.15). “Although the tax is imposed on insurers or employers, the burden is expected to fall on wages. In some cases, employers will retain the Cadillac insurance plans and pass the tax on to workers in the form of lower wages. In other cases, employers will substitute taxable wages for insurance coverage in excess of the threshold, and employees will be subject to income and payroll taxes on those wages. Revenue projections assume the latter situation will be more common.” (in a footnote, the author asserts: “This is a standard view of a tax that burdens employee compensation” and cites CBO, JCT and Tax Policy Center analyses as proof that this is a standard assumption).
- JCT (October 2009). According to Jane Gravelle (footnote 16), “in its 2009 distributional analysis of a previous version of the Cadillac tax, JCT appeared to largely assume that the insurer would pass the full price of the tax along to the consumer and that employers would largely pass any increase in costs to wages. See Letter from Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation, to the Hon. Joe Courtney, U.S. House of Representatives, October 16, 2009, p. 2. According to Paul Van de Water, “JCT estimates that over 80 percent of the revenue raised by the proposal would stem from income and payroll taxes on these higher wages.”
- Senator Max Baucus (December 2009). (Video, 12.9.09) “The bulk of the revenue raised by this provision, more than 83% of it, comes not from the tax itself, but from increased wages — increased wages — as account of this provision. And MIT economist Jonathan Gruber estimates this provision will cause worker wages to rise by $55 in 2019. That is $700 in additional income for every household with health insurance.”
- Senator John Kerry. Why This Progressive Is Sticking By the Tax on Insurance Companies. (1.7.10) “There’ve been a lot of claims made and exaggerations leveled in the last days about a provision in the Senate-passed health reform bill that places an excise tax on the insurance companies that offer high cost health insurance plans. A lot of it comes from the right wing that wants to kill health care reform. But a lot of it also comes from friends who share my convictions about health care.
- First, striking this provision from the final bill will make it much more difficult to pass final health reform legislation in the Senate and that’s a huge mistake when we’re closer than ever to completing a journey that began with Harry Truman.
- Second, this is an idea that will help health reform succeed in the long run. It will create competition and place sunshine on the process of pricing health insurance premiums.
- Third, it will help control future health care costs without — I repeat without — directly taxing employees. Unlike a cap on the existing tax exclusion of health insurance benefits, which I oppose, this provision will not require employees to include a portion of their employer provided benefits as part of their taxable wages.
- Fourth, the excise tax included in the Senate-passed health care bill will affect only a small portion of the very highest cost health plans.
- Fifth, for the small sub-set of plans that are affected, the likely impact will be to increase workers’ wages.”
- Health Policy Experts
- Conover, Chris. Will The Obamacare Cadillac Tax Increase Worker Wages? Forbes.com (11.6.15) “It’s a trick question: the answer depends on whether employers respond to the Cadillac tax by trimming health benefits to avoid the tax, or instead simply keep their health benefits as is and pass the tax onto their employees. For employers who trim health benefits I have a high degree of confidence that on average, worker wages will rise. For employers who absorb the Cadillac tax increase, average worker wages will fall.”
- Emanuel, Ezekiel.
- Emanuel E, Fuchs V. Who Really Pays for Health Care? The Myth of ‘Shared Responsibility.’ (JAMA, 3.5.08) Citing Eberts and Stone (1985) and Gruber (1994) (see studies here) Emanuel and his colleague write: “Importantly, several studies show that when workers lose employer-provided health insurance, they actually receive pay increases equivalent to the insurance premium.”
- City Club of Cleveland Programs. (6.26.08) Emanuel, in a health reform speech in Cleveland, assured the audience that employers convert benefit cost savings to increased salaries. “People that get their insurance through their employer? They’re gonna get a pay raise. If your employer no longer has to provide you health insurance, they’re gonna raise your salary. Right? You’re skeptical? First of all, like all good academics, let me retreat behind all the studies. All the studies, and I mean all the studies ever done on this topic, show that that’s the case — that in fact when people switch from jobs that have health insurance to jobs that don’t, an equivalent full dollar-for-dollar payment. And I’d be happy to provide you with all the citations.”
- Gruber, Jonathan.
- Statement of Professor Jonathan Gruber Before the Senate Finance Committee. (7.28.08) “Both economic theory and a large body of economic evidence show that there are no employer dollars: the money that employers spend on insurance would otherwise just be spent on worker wages.”
- Implications of the JCT Score of the High-Cost Insurance Tax. (11.5.09) “The high-cost insurance tax presents a rare ‘win-win’ opportunity: it can both finance necessary expansions in health care for our lowest income citizens and provide an effective tool to lower health care spending. By lowering health care spending, the high-cost insurance tax will shift more compensation into wages and improve the standard of living of U.S. workers…Using data from the JCT, I show in this memo that the high-cost insurance tax will: (a) Raise worker wages by $74 billion in 2019, net of all High-cost insurance tax payments made on the workers behalf; (b) The cumulative rise in wages from 2013 through 2019 is $313 billion – more than one-third as large as the entire net cost of the entire reform package; (c) Almost two-thirds of these gains accrue to families with incomes below $100,000, and (d) more than 90% of these gains accrue to families with incomes below $200,000.”
- Response to AFSCME Criticisms of the High Cost Health Insurance Tax. (11.17.09) “The available evidence clearly illustrates that there is essentially a one-to-one offset between employer insurance spending and wages. There are a number of economics studies that support this conclusion.”
- Impacts of the Senate High Cost Insurance Excise Tax on Wages: Updated. (11.20.09) “It is important to note that the conclusion that lower employer insurance spending will lead to higher wages is not mere speculation: it is strongly supported by both economic theory and evidence. This is why it is the basis for the modeling done by both JCT and CBO.”
- ‘Cadillac’ Tax isn’t a Tax—It’s a Plan to Finance Real Health Reform. Washington Post (12.28.09). “[W]hen firms reduce their insurance generosity, they make it up in higher pay for their workers. We saw this in the late 1990s, when the rise of managed care temporarily lowered insurance costs, and wages rose in real terms for the first time in many years. But as soon as managed care was weakened and health costs rose again, we once again saw flat or declining real wages in the United States.”
- Krugman, Paul. The Health Insurance Excise Tax. New York Times (1.9.10) “There’s the argument that any reductions in premiums won’t be passed through into wages. I just don’t buy that. It’s true that the importance of changing premiums in past wage changes has been exaggerated by many people. But I’m enough of a card-carrying economist to believe that there’s a real tradeoff between benefits and wages.”
- Mermim, Gordon and Eric Toder. Analysis of Bipartisan Policy Center Cadillac Tax Replacement Option, Tax Policy Center, July 2015.
- Van de Water, Paul. Excise Tax on Very High-Cost Health Plans Is a Sound Element of Health Reform. Center on Budget and Priorities. (11.10.09). “Most of the affected health insurance plans would not actually pay the excise tax. Employers would modify their health plans to stay within the thresholds for the excise tax, and they would convert the resulting savings into higher wages or other fringe benefits for their employees.”
- Health Policy Journalists
- Chait, Jonathan. Let Me Explain the Cadillac Tax. (New Republic, 1.12.10) “Clearly the notion that premiums and wages offset one another has an impressive pedigree. There may be evidence to the contrary, but I haven’t seen any of the critics produce it. Lest you worry this is all too theoretical — Sloan keeps emphasizing that it’s an ‘assumption’ — Ezra Klein also had a chart showing just how this relationship worked over the last two decades…Update: Ezra now says the chart proves too much — the rise in health costs isn’t large enough to drive the wage trends. My faith in infographics has been shaken to the core. But my faith in the Cadillac tax remains ardent.”
- Klein, Ezra.
- Explaining the Excise Tax. Washington Post (10.20.09) “The excise tax was a compromise thought up in Sen. John Kerry’s office. Actually, ‘thought up’ isn’t quite the right term: It was unearthed by a clever staffer combing old ideas from the 1994 reform effort. The appeal of the proposal is that it has the same effect as capping the deduction, but with very different politics: It taxes ‘insurers’ rather than ‘employers,’ which sounds a lot better. The tax, however, is passed down to employers, so the impact is virtually identical…It will, in other words, be more like the managed care of the 1990s, which brought down spending and didn’t hurt health outcomes, but which people really didn’t like. ‘Managed care worked,’ says Gruber, ’but workers didn’t know it. They didn’t see the benefit. We’ve got to make them feel the pain of not reforming and enjoy the benefits of reforming.’ In this case, the pain will be the excise tax. The benefit will be the higher wages they get, and the lower tax burden their children face, when their employers begin choosing higher-value policies.”
- Will Lower Health-care Costs Mean Higher Wages? Washington Post (10.21.09) “Earlier in the day, I’d been talking to MIT economist Jon Gruber about this issue. ‘There are a few things economists believe in our souls so strongly that we have a hard time actually explaining them,’ he said. ‘One is that free trade is good and another is that health-care costs come out of wages.’ To put it another way: Economists are pretty united on this point. A firm’s compensation for its workers is pretty static, and if relatively more goes to health-care costs, relatively less will go to wages, and vice-versa. But this isn’t just a matter of theory. The following graph charts the percent growth in the median household income versus the percent growth in health-care costs since 1990. The correlation is striking.”
Critics of the Wage-Benefits Trade-off Assumption
- Policy Experts
- Allegretto, S and Bernstein, J. The Wage Squeeze and Higher Health care Costs. (Economic Policy Institute, 1.26.06) “The fact that health costs have risen so quickly in recent years surely creates serious economic challenges for American businesses. It does not, however, account for the shrinking real paychecks for many in the workforce. Close to half of the workforce lack employer-provided health care, and those who have lost the most in real wages are the least likely to even have health coverage, the opposite of the trade-off suggested by Hubbard. In addition, over the last few years, as wage growth has declined, growth in health care benefits and total compensation also declined. These trends reflect the fact that strong productivity growth has done little to better the living standards of working families which has been a hallmark of the current economic expansion.”
- Jost TS, White J. Case Western Reserve University Center for Policy Studies; December 2009. Cutting Health Care Spending: What is the Cost of an Excise Tax that Keeps People from Going to the Doctor? “The assumption that benefit cuts will result directly in one-to-one wage increases is heroic, to say the least. Economists assume that wages and benefits are simply interchangeable, but human resources specialists in corporations do not expect to follow the theory.”
- Mishel, L. Employer Health Costs Do Not Drive Wage Trends.
- Economic Policy Institute. (1.6.10) “Health care costs are not large enough to substantially move wages…’The health care theory of wage determination’ is wrong, and other factors explain these overall wage trends.”
- The Seminal. (Comments section, 1.12.10) “I do think Gruber’s claim about the wage impact of lower health care inflation in the 1990s (and the reverse trends in the 200s) was wrong: The simple tale seemed to support his policy desire to curtail health care costs via the excise tax but digging into the details shows that health care costs have not driven wage trends. This does not mean that lower health care costs might not lead to better wages, just that the scale of the impact won’t move wages appreciably… he’s a health care economist and doesn’t know the details about wage trends. I, on the other hand, have been studying wages for thirty years or more. Gruber clearly over-reached with the argument about health care driving wage trends and has acknowledged that to me privately (yesterday). So, I think he’s wrong on this issue and I also disagree with him on the overall merits of the health excise tax.”
- Reich, R. Rep. Joe Courtney: I have 190 Democrats Against the Tax on ‘Cadillac’ Health Insurance Plans. (1.6.10) Economists Robert “Reich and Mishel both pushed back on the idea that employers would make up for decreasing their health care costs by increasing wages for employees. ‘There’s no reason to assume that wage increases will come forth, especially in the current environment, and there’s no reason to suppose that wage increases would equal the amount of coverage foregone,’ because that coverage came on pre-tax dollars. Mishel added that health care costs are not a major part of overall compensation packages (about 7%), and the rise in health care spending by employers over the last twenty years would have amounted to just a 0.1% increase in wages annually. ‘The problem is that workers are not benefiting from productivity growth because employers have the upper hand,’ Mishel said. ‘If health care costs go down, employers won’t raise wages in response.’”
- Daily Kos ( SilverOz, 1.12.10) Ezra Klein is an Idiot, or Why Medical Costs and Wages Don’t Mix. In response to Ezra Klein’s support of the wage-benefits tradeoff, The Daily Kos reported a study over 1975-2008, discovering that “medical costs and wages have almost no correlation.” Those hoping for a raise, the researcher wrote, should “pray for the unemployment rate to decline instead of a tax increase on your medical insurance.”
- Hamsher J. (Huffington Post, 3.18.10) How the White House Used Gruber’s Work to Create Appearance of Broad Consensus. “Gruber is also cited repeatedly to substantiate the claim that the excise tax will result in higher wages after employers reduce benefits, because they’ll pass those savings on to workers.” That argument “flies in the face of all reason, and nobody has been able to point to a study showing that when health care costs go down, businesses mostly share those savings. Quite the contrary.”
- Herbert B. A Less Than Honest Policy. (New York Times, 11.28.09) “According to the Joint Committee on Taxation, less than 18 percent of the revenue will come from the tax itself. The rest of the $150 billion, more than 82 percent of it, will come from the income taxes paid by workers who have been given pay raises by employers who will have voluntarily handed over the money they saved by offering their employees less valuable health insurance plans. Can you believe it?…The tax on health benefits is being sold to the public dishonestly as something that will affect only the rich, and it makes a mockery of President Obama’s repeated pledge that if you like the health coverage you have now, you can keep it. Those who believe this is a good idea should at least have the courage to be straight about it with the American people.”
- Mahar M. Fact-check: The Cadillac Controversy. (12.31.09). “(Gruber) must be kidding. Take a look at unemployment. Consider the state of the economy. Review average wages over the past twenty years. Do you really see employers hiking salaries? Granted, hourly wages finally began to rise in the late 1990s, but this was only after years of seeming prosperity coupled with wage stagnation. Unless the job market is very tight, employers share profits with investors long before they begin handing out raises.”
- Sloan, A. (Fortune Magazine senior editor-at-large). Excise Tax on ‘Cadillac’ Health-care Plans is a Bad Idea. (Washington Post, 1.11.10) “Economists at the joint committee and most other places assume — I’ll repeat that: assume — two things. First, that to avoid this tax, employers will pay less toward health insurance than they otherwise would. Second, that the money employers don’t pay on health care will go to employees as higher salaries. Call me skeptical — or cynical — but I find it hard to believe that any employer would pay more to employees if it paid less for health care. I also find it hard to believe that employers can work any harder than they already do to hold down health-care costs. But that’s the assumption underlying the idea that the tax will hold down future costs.”
- Wheeler M. Gruber Caveats the ‘Excise Tax Raise’ Claim. (1.9.10) “The Economic Policy Institute did analysis – partly based on White House aide Jared Bernstein’s work – showing that wages didn’t go up in the 1990s because health care cost increases slowed. In other words, no one has been able to point to a study that supports the case. And a lot of data from the real world suggests just the opposite would occur–that employers would pocket the savings as profit rather than passing them onto employees… The popular press often cites Gruber for this claim (without, of course, any disclosure that he’s working for the Administration), and Gruber cites JCT. And neither of them, apparently, cite any study proving this claim.”
- Unions. According to the New York Times (11.28.09) unions have been particularly skeptical of the wage growth proposition. “Richard Trumka, president of the A.F.L.-C.I.O., laughed at the prospect of wage increases. ‘I had to wait for him to stop laughing to get his answer. ‘If you believe that,’ he said, ‘I have some oceanfront property in southwestern Pennsylvania that I will sell you at a great price.’…’In the real world, companies cut costs and they pocket the money,’ said Larry Cohen, president of the Communications Workers of America and a leader of the opposition to the tax. ‘Executives tell the shareholders: ‘Hey, higher profits without any revenue growth. Great!’”
- Communications Workers of America Research Department. Health Care Excise Tax = A Big Middle Class Tax Increase. (10.13.09) “Proponents of the excise tax claim that workers will not lose under the excise tax because any health benefits cuts will be offset by an increase in their wages. Based on years of bargaining with some of the nation’s largest employers CWA does not believe this to be true.”
- United Steelworkers. (12.03.09) Employers Will Respond to an Excise Tax on Health Plans by Cutting Benefits, not Increasing Wages. “Proponents of the excise tax on higher‐cost health plans fail to note that the excise tax will result in a significant reduction in existing health benefits. They also make a misleading claim that workers will not lose under the excise tax because they assume that employers will offset any health benefits cuts with an increase in worker’s wages. The experience of unions that negotiate with employers and two recent surveys of employers by Mercer and Towers‐Perrin (465 employer health plan sponsors and 433 human resource executives, respectively) illustrate how the excise tax will hurt middle class families.”
- National Association of Letter Carriers. Fix or Drop the Excise Tax on Health Plans in the Senate Health Care Bill (12.7.09) “While initially intended to tax excessively generous health benefits (so-called “Cadillac” plans), closer analysis shows that it will eventually affect the majority of federal and postal employees and much of the American middle class…The excise tax currently in the Senate’s health reform bill would have a significant negative impact on FEHBP plans. If the NALC HBP’s premiums increase 7 percent per year over the next decade or so, the tax burden per worker with average dental and vision plans will be $6,442 per employee for the self-only plan between 2013 and 2022 and $3,339 per employee for the family plan over that 10-year period. If employees in the self-only plan also contribute $1,000 per year to an FSA, the 10-year tax burden on the plan would jump to $10,294 by 2022. If employees in family plans also contribute $2,000 per year to an FSA, the plan’s tax burden would grow to $7,034 between 2013 and 2022. In the face of this excise tax, the NALC HBP would face two bad choices—either pass the tax onto enrollees, or slash benefits and/or increase out-of-pocket expenses for the insured. Letter carriers and other federal employees in the NALC plan would end up paying more, getting less, or both. NALC supports health care reform, but not the Senate’s excise tax.”
- Greenhouse S. Unions Rally to Oppose a Tax on Health Insurance. (New York Times, 1.8.10) “United Steelworkers president Leo Gerard and other labor leaders were equally skeptical. “The people who are promoting this tax say companies will make up for this with higher wages. These people who say that have never been at the bargaining table. It doesn’t work that way.”
Pre-ACA Journalist Commentary
- Ableson, Reed. A Tax on Cadillac Health Plans May Also Hit the Chevys. (New York Times, 9.20.09) “Although cast as a tax on gold-plated insurance policies for the well-heeled, it has prompted anxiety among the middle class. The idea, proposed last Wednesday by Senator Max Baucus, is to help raise money for the nation’s health care overhaul by placing a new excise tax on the most expensive health insurance policies, like the ones offered to partners at Goldman Sachs and other affluent professionals. The tax is meant to raise more than a quarter of the $774 billion needed to pay for the Baucus plan. But just as much, the tax is intended to discourage the overly generous coverage that many experts say has helped propel the country’s reckless spending on medical care. As it turns out, though, many smaller fish would get caught in Mr. Baucus’s tax net.”
- McArdle Megan. Scoring the Baucus Bill: Tax Dynamics. The Atlantic. (10.14.09). “The CBO projects $180 billion in ‘gross cost’ of the coverage expansion–i.e., what the government will spend on Medicaid and SCHIP expansions, operating the exchanges, and subsidizing the purchase of standardized policies therein. It turns out that about $58 billion, or just about one third of that cost, is being paid for by expecting employers to substantially lower their costs and pass through all the savings to their employees, who then pay taxes on them. As revenue-raising mechanisms go, this is pretty indirect. And with so many links in the chain, you can see lots of places where this could go wrong… It’s going to be hard, ultimately, to know whether this thing was revenue neutral or not.”
- Sahadi Jeanne. Health Insurance Tax = Higher Wages? CNN Money (11.06.09) “Sound implausible? Well, there doesn’t seem to be much precedent. When CNNMoney.com asked a handful of economists and tax experts to point to just one example in the past when employers passed on a windfall in savings to their workers, no one could recall a specific instance of that happening…. ‘For those at the bottom [of the income distribution], who saw even more wage stagnation than those at the top, health cost inflation can’t explain the squeeze on wages because they have health insurance coverage at much lower rates,’ said Elise Gould, director of health policy research of the liberal Economic Policy Institute… If wages do rise as a result of employers’ saving money on health costs, it won’t happen overnight. And ‘no one’s arguing it will be a dollar-for-dollar offset,’ said Paul Van de Water, senior fellow at the liberal Center for Budget and Policy Priorities. ‘Some of it will go to shareholders,’ said Howard Gleckman, editor of the blog Tax Vox and senior research associate at the nonpartisan Urban Institute. But, he added, ‘I think some of it will end up in wages.’ If the economists are wrong and wages don’t rise, that could be a sign that health costs aren’t falling as much as hoped. In that case, he noted, the revenue to subsidize insurance purchases would instead come from the tax being imposed on a growing number of high-cost health plans. So, workers would end up with higher health costs and no wage increase.”
Pre-ACA Employer Survey Data
- Towers Perrin. (September, 2009) Towers Perrin Employer Survey: Health Care Reform 2009: Leading Employers Weigh In: Only nine percent of respondents in Towers Perrin’s survey said they would “increase salaries/direction compensation…Survey respondents who have a clear course of action in mind (i.e., once again excluding those who gave ‘don’t know’ responses) would not shield employees from any cost increases that reform might bring for them (Exhibit 11). And if any savings were to result from reform, most employers would retain those savings in the business (Exhibit 12).” 87 percent reported that their companies would reduce benefits “if health care reform increases employer costs.”
- Mercer Survey. (11.3.09) Majority of Employers Would Reduce Health Benefits to Avoid Proposed Excise Tax, Survey Finds. Just 16 percent of the employers it surveyed during a Web seminar on health care legislation would be “likely” or “very likely” to raise wages if they cut benefits to avoid being hit by the excise tax. Another 65 percent said they would be “unlikely” or “very unlikely” to raise wages to offset benefit cuts, while 20 percent were ”not sure.”
Estimates of Revenue
The excise tax proposal created by the 2009 Senate Finance Committee was scored by the Congressional Budget Office (CBO) as generating $201.4 billion over seven years (2013 through 2019), with receipts growing “by roughly 10 percent to 15 percent per year in the following decade.” As modified in the final version of the ACA (March of 2010), the excise tax was projected to generate $32B from 2018-2019. In June, 2012, CBO estimated $111B would be generated from 2018-2022. Revenue estimates have varied in subsequent CBO/JCT reports.
- CBO. May 2013. $80B from 2018 to 2023, “a nearly 42% decrease from the $137 billion in excise tax revenue that the CBO projected in February.“
- Congressional Budget Office, “Table 1: May 2013 Estimate of the Affordable Care Act on Health Insurance Coverage,” May 2013.
- Congressional Budget Office, “Updated Budget Projections: Fiscal Years 2013 to 2023,” May 2013.
- Nussbaum A, “Health Law’s Cadillac Tax Bite on Companies Drops by $57 Billion,” Bloomberg News, May 16, 2013.
- CBO. February 2014. $108B from 2018-2024. (“$31 billion in excise tax receipts and about $77 billion in higher net revenues from the associated effects of changes in employees’ taxable compensation.”) The Budget and Economic Outlook: 2014 to 2024.
- CBO. April 2014. $120B from 2018-2024. Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act, April 2014.
- CBO. January 2015. $149B from 2015-2025. The Budget and Economic Outlook: 2015 to 2025.
- CBO. June 2015. $87B from 2018-2025. Budgetary and Economic Effects of Repealing the Affordable Care Act.
- JCT. September 2015. $91B from 2018-2025. Estimated Budget Effects Of An Amendment In The Nature Of A Substitute To The Budget Reconciliation Legislative Recommendations Relating To Repeal Of Certain Excise Taxes.
- Tax Foundation. June 2016. After the tax was delayed until 2020, Tax Foundation estimated that revenues would be $31 billion over the budget window (2016-2025), or $26 billion on a dynamic basis (p. 117).
Potential Impact on Health Spending
- CRS (August 2015). “Estimates suggest that the Cadillac tax could lead to an overall decline in the quantity of health services as some firms reduce the size of their insurance coverage. This decline is estimated to range from 0.5% to 0.6% in 2018 and from 2.2% to 2.5% in 2024. Prices could fall by up to 0.4% in 2018 and up to 1.5% in 2024 (although costs paid by some consumers could rise due to cutbacks in Cadillac plans). Overall expenditure (the sum of the fall in quantity and the fall in price) could decline by 0.6%-0.9% in 2018 and by 2.5%-3.6% in 2024. In other words, the tax could result in a gross reduction of $7.6-$11.0 billion in national health expenditures in 2018 and $41.0-$60.3 billion by 2024.”
- The Cadillac Tax: Why Economists, but Few Others, Love It. (Barro, J. New York Times, 10.5.15). “[T]he revenue effects of the Cadillac tax are minor compared with the tax’s much larger effects on health care spending. It would be harder for Mrs. Clinton to replicate those cost-control benefits than to replicate the revenues… According to an August report from the Congressional Research Service, the tax can be expected to result in between $40 billion and $60 billion less in health care spending per year by 2024. That’s about a 3 percent reduction, and it’s several times larger than the direct impact of the Cadillac tax on government revenues. The reduction in health care costs due to the Cadillac tax would also flow back, in significant part, as lower government spending on health care. Medicare and Medicaid would benefit from a lower price environment, and it would be less expensive to subsidize private health plans brought though the A.C.A. exchanges. That is, if retained, the tax will help contain costs on the spending side of the federal budget, in addition to providing $87 billion of revenue through 2025.”
Number of Affected Workers
Because the dollar thresholds used to determine which plans are subject to tax increase annually only at the rate of increases in general inflation rather than medical inflation (which for decades has been 1.9 percentage points higher), the Cadillac tax will eventually target even the least expensive plans. “Think of the excise tax situation as a room,” says Frank Easley, Senior Vice President, Health & Benefits, Aon Hewitt. “The government has set the ceiling: at $10,200 or $27,500. These numbers remain relatively stable: they increase with the consumer price index. The floor—which is the cost of a minimum value plan—continues to rise. The current trend is between three and four percent a year. This is expected to accelerate, based on increases in chronic condition rates, greater utilization of specialty drugs, the aging of the population, and other factors. In the not too distant future, the floor will reach the ceiling—squeezing companies between the two.”
Items are in reverse chronological order.
- United Benefits Advisors (December 2015). Even Bronze-Level Plans Subject to Excise Tax, Finds UBA Survey. Many employers falsely assume that the Cadillac tax will apply only to the richest plans. However, newly release data from the 2015 UBA Health Plan Survey shows that even the lowest quality “Bronze-level” health insurance plans on the Affordable Care Act (ACA) exchanges are at risk of triggering the tax, potentially affecting 74 percent of employers by 2022… Of those plans with a statewide average AV between 80 and 89.99 percent, 58.68 percent will get hit, and for plans with AVs between 70 and 79.99 percent, 33.79 percent will face the Cadillac tax. “Many of these employers, even after reducing benefits and premiums, will still not be able to lower their annual costs under the Cadillac tax thresholds,” says Carol Taylor, Chairwoman of the UBA Client Compliance Solutions Committee and the Director of Compliance with D & S Agency, a Virginia-based insurance firm and UBA Partner. ‘The Cadillac tax hits those employers with an aging workforce, those with high claims and those in areas with high medical care costs. They should be strategizing now, however, to mitigate liabilities as much as possible.'”
- National Business Group on Health (December 2015). Rallying Against the Cadillac Tax (12.15.15). “The National Business Group on Health, which represents the views of its 425 employer members on national health policy issues, also opposes the tax. Based on internal estimates and analysis, the NBGH expects that 48% of its employer members will have at least one health plan triggering the tax in 2018 if they do not make any changes to the plan. Of health plans in which the most employees at a company are enrolled, only 28% would run afoul of the tax in 2018 without any changes, but that number rises to 51% by 2020, according to the NBGH. In fact, by the mid-2020s, virtually all employer health plans will be over the cost limit, according to various analyses… In an NBGH survey of 140 employer members, most respondents said they could delay the tax through plan changes by only two or three years.”
- Mercer (October 2015). Mercer’s National Survey of Employer-Sponsored Health Plans (10.16.15). “Despite the slower cost trend, more than half of the survey respondents (54%) plan to make some changes to their programs in 2016. ‘Employers are well aware that the ACA’s excise tax on high-cost plans is slated to go into effect in 2018, even as calls for reform or repeal are mounting’ says Ms. Watts. Mercer has estimated that, based on plan cost reported in 2014, about a third of all employers (31%) were on track to reach the excise tax threshold. The need to keep cost under the threshold has already prompted employers to make significant changes. In fact, one fourth (25%) of survey respondents say they are considering adding a CDHP or taking steps to increase enrollment in an existing CDHP specifically to help avoid the tax –on top of the 41% that have already done so. Other ways of avoiding the excise tax include eliminating health care flexible spending accounts (21% of respondents are considering this) and moving to a private benefits exchange (23% are considering).”
- Kaiser Family Foundation (August 2015). Gary Claxton and Larry Levitt. How Many Employers Could be Affected by the Cadillac Plan Tax? By extrapolating from premiums reported by various size employers in the 2015 Kaiser/HRET Employer Health Benefits Survey, the authors estimated how many employers would have been affected by the Cadillac tax in future years.
- The authors found that 26% of employers would have at least one plan subject to the tax when it starts in 2018; 30% of employers are projected to pay the tax by 2023, and 42% of employers by 2028.
- A much larger fraction of large firms (200 or more workers) would be affected compared to firms with 3-199 workers (e.g., 46% vs. 25% in 2018).
- Results depend heavily on assumed premium growth: assumed 4% annual premium growth, the share of affected firms would grow from 24% in 2018 to only 29% by 2028; but with 6% premium growth, the share would double from 27% in 2018 to 54% by 2028.
- International Foundation of Employee Benefit Plans.
- October 2015 Survey. Obamacare ‘Cadillac tax’—Who Wants it, and Who Won’t Pay. (10.1.15) “The survey of 442 employers that currently offer health benefits to employees found that nearly 60 percent of them have calculated that they will eventually be subject to the tax if they don’t make changes to their health plans. But only 5 percent of companies that expect eventually to be subject to the tax actually expect to pay it. Those companies say they either already have or plan to make changes to their health coverage programs that will allow them to avoid the tax.” CNBC
- May 2015 Survey. Majority of Businesses Taking Steps to Avoid ObamaCare Tax. (5.14.15) “The so-called Cadillac tax, which applies to healthcare plans above a certain expense threshold, is one of the most pressing changes still to come under ObamaCare, according to a survey of about 600 members of the International Foundation of Employee Benefit Plans. Only 2.5 percent of companies that would be hit by the Cadillac tax starting in 2018 said they plan to pay the tax. A total of 62 percent of companies said they have already taken action or plan to take action to avoid it. Most say they are shifting toward higher deductible plans, while others said they are reducing benefits, shifting more costs to employees or dropping high-cost plans altogether.” The Hill, Ferris, S.
- Towers Watson
- Towers Watson (September 2014). This survey showed that 48% of all employer plans will be subject to the tax in 2018 and 82% could hit the tax’s threshold by 2023.
- Towers Watson/NBGH (March 2014). Report: Obamacare ‘Cadillac Tax’ Comes With Unintended Consequences. (3.25.14) “The very next day, a widely circulated report by Towers Watson and the respected nonprofit National Business Group on Health (NBGH) came out, showing how the president himself has already given millions of American workers at all income levels a pay cut — to the tune of $100 a month last year. Anxious to avoid hitting the Cadillac Tax spending threshold, employers are quickly converting their benefits plans into high-deductible health plans (HDHPs)… The Towers Watson/NBGH report suggests this rapid shift to high-deductible health plans explains the slowdown in employer health cost growth (now 4.1 percent, slower than any year in the past decade)…employees’ share of premium costs plus out-of-pocket costs increased by a whopping seven percent between 2013 and 2014.”
- Wells Fargo Insurance Spring Healthcare Trend Survey. (5.19.15) Despite Low Inflation, Employers Should Expect Health Care Premiums to Surge into 2016: Looming Affordable Care Act Excise Tax. The survey of more than 65 insurance companies nationwide found that “Starting in 2018, excise taxes will be charged based on how much an employer’s plan exceeds the excise thresholds, charging $0.40 for every dollar above a set threshold. Currently, 38 percent of large employers are expected to hit the excise tax threshold in 2018 if they do not make any changes to their plan design. ‘Since the excise tax thresholds will increase annually using a cost-of-living index, it’s vital employers strive to manage healthcare cost trends in order to avoid excise taxes in the long run,’ said Nick Allen, national practice leader for Actuarial Services with Wells Fargo Insurance. ‘For many employers, healthcare cost trends will be the foremost determining factor as to whether and when their plans will exceed the excise tax dollar.’”
Impact on Workers and Firms
While the tax is assessed against insurers, carriers will offset this loss through higher premiums for companies. Firms are expected to reduce the quality of plans they offer to avoid the excise tax. For workers, this translates into higher employee premium contributions, deductibles and copayments, narrower provider networks, and reduced contributions to health and flexible savings accounts. The Tango Health Benefits White Paper is illustrative of the advice being given to employers by benefits consultants on strategies to avoid the tax.
- Tango Health Benefits (2015). Steer Clear of the Cadillac Tax. White Paper. “This paper will explore the options available to companies that currently offer high-end plans to help them avoid taking a benefits-related tax hit… Consumer-Directed Health Plans (CDHPs) also known as High-Deductible Health Plans (HDHPs) can bring down health plan costs to address Cadillac Tax concerns while still delivering quality care. They do require employees to pay more expenses out of pocket before insurance coverage kicks in, but they also have the potential to deliver a significant tax advantage that comes with the Health Savings Accounts (HSAs) associated with this type of plan.”
Reduced Overall Compensation
- Bivens J, Gould E. The House Health Care Bill is Right on the Money: Taxing High Incomes is Better than Taxing High Premiums. Issue Brief #267. Economic Policy Institute; Dec 11, 2009. “[T]he potential for cash wages to rise in response to the excise tax has been characterized lately in many venues as providing a ‘raise’ for American workers. This is incorrect: the excise tax is reducing overall compensation, period. The fact that cash wages rise just means that other forms of compensation are falling. And because some compensation that was previously being subsidized through tax policy (employer-paid insurance premiums) is now being taxed, the result is a cut, not a raise, to total compensation for American workers. There is no ambiguity about this.”
- Beezley-Smith, D. “In its March report, CBO ‘estimates’ that the Cadillac tax will ‘generally result in higher taxable income for affected workers,’ but also offers an ‘opposite assumption,’ under which employees would lose value in their plans and receive no wage hikes: ‘Under the opposite assumption—that workers’ total compensation would be reduced by the amount of the premium reduction—their employers would have smaller deductions for compensation costs, and hence more taxable income.’ In other words, CBO believes companies could just pocket the savings they realize in cutting premiums. The federal government is neutral on how they’ll acquire revenue under the Cadillac tax — they’ll either tax worker pay raises or tax their bosses’ income bumps… But if ‘wage growth’ doesn’t materialize, as CBO now acknowledges is possible, employees have less comprehensive coverage and spend more in out-of-pocket costs — and experience no offsetting wage increases.” (The Hill, 10.12.16)
- Columbia Journalism Review, (2.27.17). Cost of the Cadillac: The Obamacare Story Reporters are Missing. “‘In a few short years, the tax will affect all employer plans,’ says Steve Wojcik, a vice president at the National Business Group on Health, which is working to repeal the tax. If employers need to reduce the value of their plans to avoid the tax, then they will need to reduce benefits or increase their workers’ share of the cost, which could result in significant increases in out-of-pocket costs for 177 million workers… Economists, in particular, wanted the tax; MIT’s Jonathan Gruber, who helped to craft the ACA, even predicted the tax might raise workers’ wages from 2010 to 2019. If employers spent less on rich health benefits, the theory went, they’d pass the savings onto their workers in the form of higher wages. However, says Wojcik, ‘The reality doesn’t match the theory.’ The Kaiser Family Foundation, for example, reported that, between 2011 and 2016, deductibles for single workers increased by 63 percent while wages increased by only 11 percent.”
- High-End Health Plans Scale Back to Avoid ‘Cadillac Tax.’ (New York Times, Abelson, R., 5.27.13) “Say goodbye to that $500 deductible insurance plan and the $20 co-payment for a doctor’s office visit. They are likely to become luxuries of the past. Get ready to enroll in a program to manage your diabetes. Or prepare for a health screening to determine your odds of developing a costly health condition. Expect to have your blood pressure checked or a prescription filled at a clinic at your office, rather than by your private doctor. Then blame — or credit — the so-called Cadillac tax, which penalizes companies that offer high-end health care plans to their employees.”
- Health Care Tax Faces United Opposition From Labor and Employers. (New York Times, Abelson, R., 7.21.15) “Many employers have been taking steps like offering only high-deductible plans to their workers, said Brian Marcotte, the chief executive of the National Business Group on Health. Others are looking at less expensive plans with a much more limited network of hospitals and doctors, or are considering initiatives like on-site health clinics or programs to improve workers’ overall health as a way of lowering costs…Because of the way the tax calculates the cost of coverage, employers are also splitting off their dental and vision plans and separating coverage of early retirees from active employees to lower the dollar amount counted.”
- Could ‘Cadillac Tax’ Spell the End of Employer-Sponsored Health Plans? Albuquerque Business First (8.13.15) “According to Gary Petersen, vice president and consulting actuary for the Tempe, Arizona’s Segal Co., the 40 percent excise tax on employers that offer high-cost health plans could potentially end not only flexible spending accounts, but also eliminate employer-sponsored health plans entirely by the mid-to-late 2020s.”
- Companies Desperate to Avoid ObamaCare ‘Cadillac Tax’ Shifting Costs to Workers. (FOX News, 8.14.14) “‘The excise tax, when it hits in 2018, will affect both employers and employees,’ said Brian Marcotte, president of the National Business Group on Health….Employers are shifting workers into plans with higher deductibles, just as ObamaCare does in the health care exchanges, and using health savings accounts to help defray the costs. Another cost saver, Marcotte added, is to increase premiums for spouses who have access to other plans.”
- Cadillac Tax Could Wreck Popular Medical Accounts. (Politico, 8.31.15) “Flexible spending accounts, which allow people to save their own money tax free for everything from doctor co-pays to eyeglasses, may vanish in coming years as companies scramble to avoid the law’s 40 percent levy on pricey health care benefits. ‘They’ll be one of the first things to go,’ said Rich Stover, a health care actuary and principal at Buck Consultants, an employee benefits consulting firm. ‘It’s a death knell for them. If the Cadillac tax doesn’t change, FSAs will go away very quickly.’”
- ‘Cadillac Tax’ Is Hated, But It Might Be Working. (Real Clear Politics, 9.24.15) “Autoworkers had won unusually generous health benefits in previous contracts, perks they won’t give up just because workers in other sectors have lost theirs. But with health costs rising and the Cadillac tax looming, union negotiators knew they couldn’t let this be management’s problem alone. ‘For quite some time, the auto unions have recognized a reality in U.S. economics that not all other workers are as keenly aware of,’ says Ceci Connolly, managing director of PwC’s Health Research Institute. ‘And that is that rising health care costs bite into wages.’ So the union has agreed to ‘find areas of opportunity to reduce cost’ if that’s needed to stay under the tax threshold, even if that means charging higher deductibles for plans subject to the excise. More importantly, the union proposed an unusual level of labor-management collaboration to tackle rising health costs. The draft agreement calls for labor and the Big Three domestic automakers to pool resources in a co-op ‘to explore innovative ways of improving the delivery of negotiated health care benefits in a manner that increases quality, lowers cost, produces less waste and provides better patient care.’”
- Specific Steps Employers are Taking to Fend Off the Cadillac Tax. (Employee Benefit Advisor, 10.26.15). “Employers have begun to eliminate a variety of services, cap health savings accounts and flexible spending accounts, and offer less-expensive provider networks, according to Greg Morano, chief executive officer of Univers, a benefit communications, enrollment and administration solutions provider…Earlier this year Paul Fronstin, director of the Health Research and Education Program for the Employee Benefit Research Institute, told EBA he predicts many employers who sponsor high deductible health plans will drop contributions to HSAs to minimize their exposure to the excise tax. Morano says he’s also seeing employers increasingly move toward offering high-deductible plans.”
Characteristics of Workers Affected
- CNBC reports (8.12.15) that “even with a high-deductible option, in some states the excise tax will be hard to avoid. Critics charge that the flat dollar threshold doesn’t take into account regional differences in medical costs, which factor into high insurance rates in many areas of the Northeast, and western states like California and Alaska. ‘You can have a very moderate plan in a high-cost area that costs more than someone with a rich plan in a low-cost area,’ said Marcotte. The threshold also places an undue burden on older workers, who may need more coverage, O’Brien said. For them, avoiding the Cadillac tax could be virtually impossible. ‘You’ve got to figure out what nobody else has been able to figure out, which is how to get health-care costs at or below the rate of inflation in the economy,’ O’Brien said. ‘All the experts haven’t figured out how to do that, but that’s what workers are being told has to happen for their health plans.’”
- According to Americans for Tax Reform (10.3.12), this tax increase will most directly affect union families and early retirees. Middle class union members tend to be covered by such plans in states like Ohio, Pennsylvania, Wisconsin, and Michigan.
- According to United Benefits Advisors (December 2015), “the Cadillac tax hits those employers with an aging workforce, those with high claims and those in areas with high medical care costs.”
- Tax Foundation (June 2016). Repealing the Cadillac Tax would benefit middle-income taxpayers more than any other income group, increasing their after-tax incomes by 0.07 to 0.08 percent on a static basis and 0.11 to 0.13 percent on a dynamic basis (p. 118, includes table).
- Woolhandler S, Himmelstein D. (March 2016) . The “Cadillac Tax” on Health Benefits in the United States Will Hit the Middle Class Hardest: Refuting the Myth That Health Benefit Tax Subsidies Are Regressive (3.9.16). “In this study, we calculate the value of tax subsidies in 2009 as a share of income for each income quintile and for the wealthiest Americans. In absolute dollars, tax subsidies were highest for families between the 80th and 95th percentiles of family income and lowest for the poorest 20%. However, as shares of income, subsidies were largest for the middle and fourth income quintiles and smallest for the wealthiest 0.5% of Americans. We conclude that the tax subsidy to employment-based insurance is neither markedly regressive, nor progressive. The Cadillac Tax will disproportionately harm families with (2009) incomes between $38,550 and $100,000, while sparing the wealthy.” International Journal of Health Services.
Other Adverse Effects
- Emergency Physicians: ‘Cadillac Tax’ Leads Patients to Delaying Necessary Care. (AFL-CIO, 10.29.15). “In a new poll, 70% of emergency physicians say that patients with health insurance are delaying seeking emergency medical care because of high deductibles, co-pays and co-insurance. Supporters of the so-called Cadillac Tax on expensive health care plans say increases in out-of-pocket requirements are a good thing that will lead to a decrease in unnecessary care. But research suggests the tax, which goes into effect in 2018 as part of the Affordable Care Act, also will result in people who are sick getting fewer health care services they need to get healthy or manage their illnesses. In recent years, out-of-pocket expenses working people pay to use their health insurance have been increasing. The Kaiser Family Foundation found that ‘[s]ince 2010, both the share of workers with deductibles and the size of those deductibles have increased sharply. These two trends together result in a 67% increase in deductibles since 2010, much faster than the rise in single premiums (24%) and about seven times the rise in workers’ wages (10%) and general inflation (9%).’” Because deductibles are increasing much faster than wages, patients aren’t seeing the slowdown in health spending that has been in the news lately.”
Delay of the Excise Tax until 2020
While the Cadillac tax was not repealed in the Consolidated Appropriations Act, 2016 passed by Congress and signed into law on December 18, 2015, it was given a two-year delay until 2020. The 65-33 Senate vote followed overwhelming passage in the House, “delivering a rare bipartisan compromise as lawmakers headed out of Washington for the holiday recess.” The new law also weakened the effect of the tax by making it tax-deductible for businesses.
Items are presented in reverse chronological order.
- The Hill (3.24.16). CBO: Cost of ObamaCare Subsidies Climbs by 11 Percent. “The cost is also going up by about $28 billion because of Congress’s recent legislation that postponed what’s called the ‘Cadillac tax,’ on high-cost insurance plans. That bill also made the tax deductible to employers, further decreasing the amount of money the Affordable Care Act pulls in.”
- U.S. Chamber of Commerce (3.10.16). Cadillac Tax Delay Is a Down Payment on Its Repeal: Despite the Delay Employers are Making Health Benefits Changes. “Similar trends emerged in our August 2015 surveys. Among the firms responding to our surveys, 64 percent of Cadillac-yes firms said that they are making modifications to their health plan or switching to a new provider in response to the ACA in general. This compares to 55 percent of Cadillac-no firms. Among firms making changes, some responses from Cadillac-yes and Cadillac-no firms are similar: The vast majority of these firms are retrenching their plans by raising total premiums, deductibles, and out-of-pocket maximums. But even with the delay, the excise tax still looms over employers. Employee Benefits News reports that a Wells Fargo Insurance study found: More than half (58%) of the employers surveyed expect their medical plan costs to exceed the thresholds for the Affordable Care Act’s Cadillac tax, which was originally due to take effect in 2018, but has been delayed until 2020. Additionally, 70% of employers expect their budgets for benefit plans to increase, the report says.”
- Beezley-Smith, D. (3.9.16). ACA Constantly Changing, Revised. “Congress aimed to relieve some of the pressure of the looming 40 percent ‘Cadillac’ tax on employer-sponsored insurance (ESI) in two ways: by delaying implementation two years and by allowing it to be tax-deductible as a business expense. Employers had begun readying for the tax long ago, though, trimming the value of insurance policies and increasing worker cost-sharing. Will the tax delay inspire employers to temporarily restore plan generosity? Dayton, Ohio, benefits specialist Henry Stern doesn’t think so. ‘I’m not seeing plans getting beefed back up.’ Health policy expert Timothy Jost believes the answer depends on the perceived future of the Cadillac tax itself. If delay is viewed as a signal of the tax’s eventual repeal, it ‘may in fact have an effect on employee benefits going forward.’”
- Blahous, Charles (12.22.15). Five Lessons of the Cadillac Plan Tax Failure.
- “Lesson #1: Save before you spend. Regardless of one’s view of whether the ACA’s particular savings measures were ever likely to pan out, my other observation from that paper remains a broadly applicable legislative principle: ‘The proceeds of such cost-savings cannot safely be spent until they have verifiably accrued.’ This principle was not heeded with the ACA.
- “Lesson #2: Don’t assume a favorable future political alignment. I noted in 2012 that ‘it did not survive its initial clash with political pressures; the form of the tax enacted with the ACA was almost simultaneously amended in accompanying reconciliation legislation, changes that both postponed the effective date and increased the thresholds below which the tax would not apply.’ Thus, ‘to assume that the tax will always be applied to the letter of current law is to assume that political actors in the future will be far more committed to this tax than even the original authors of ACA were.’
- “Lesson #3: Be transparent. This opacity received negative attention when videos surfaced of ACA architect Jonathan Gruber asserting that he and other proponents engaged in “mislabeling” to invisibly achieve the Cadillac plan tax’s policy goals. But apart from ethical considerations, deliberate opacity is often a tactical mistake…The opacity created a situation in which support was largely confined to a small community of experts who had bought into the tax’s purpose, while powerful constituencies on both sides of the aisle rose in opposition.
- “Lesson #4: Partisan victories can be short-lived. Politically difficult measures like the Cadillac plan tax are much easier to defend if enacted with bipartisan support. If on the other hand legislation is passed over the strong and unified objections of one of the two major parties, it’s often only a matter of time before that party has an opportunity to repeal strongly disliked parts of that legislation.
- “Lesson #5: Don’t campaign against necessary policy steps. The ACA was enacted after presidential candidate John McCain had been successfully attacked for his proposal for to scale back the ESI tax preference – even though experts on both sides understood his basic idea to be a necessary policy step. When this happens, those elected to office find themselves with a bad choice between breaking their word and furthering large policy problems. A core reason we now lack an effective mechanism to constrain the drivers of excess health cost inflation is that prior to the ACA it was not adequately presented to voters what that might involve.”
Research and Analysis
- Herring B, Lentz LK (Winter 2011-12). What Can We Expect from the ‘Cadillac Tax’ in 2018 and Beyond? “One controversial aspect of the Patient Protection and Affordable Care Act is the provision to impose a 40% excise tax on insurance benefits above a certain threshold, commonly referred to as the ‘Cadillac tax.’ We use the Employer Health Benefits Survey, sponsored by the Kaiser Family Foundation and Health Research and Educational Trust, to examine the number and characteristics of plans that likely will be affected.” Inquiry 48, no. 4 (2011-2012 Winter): 322-37.
- CRS (August 2015). Gravelle, Jane. The Excise Tax on High-Cost Employer-Sponsored Health Insurance: Estimated Economic and Market Effects. Congressional Research Service (8.20.15). This is a detailed analysis of all dimensions of the expected economic impact of the Cadillac tax, including an estimate of net social welfare effects.
- Office of Congressman Joe Courtney (October 2009). Nonpartisan Analysis Shows Proposed Excise Tax on Health Care Benefits Will Burden Families, Individuals, October 20, 2009 (see page two).
Policy Research Organization Studies
Items are presented in reverse chronological order.
- Citizens for a Responsible Federal Budget (2.22.17). Options to Replace the ACA Cadillac Tax. “Changes to the ESI tax exclusion can help to cover these costs. Capping the income tax inclusion at the 75th percentile of plan costs beginning in 2020 would raise $200 billion – enough to fund the revenue loss from repealing the Cadillac tax twice over. Under this policy, companies could offer insurance plans of any size, but employees would pay income tax on any cost above $9,500 ($23,900 for families) just as they would on cash wages. A similar cap set at the 50th percentile level would raise $400 billion over a decade.”
- Brookings/Urban Institute (1.4.17). Building A Better “Cadillac.” “The paper proposes direct relief of low- and moderate-income households to relieve them of potentially burdensome out-of-pocket costs likely to result from changes in insurance plans induced by the tax. They endorse simple administrative changes to avoid an unintended side effect of the current law that would discourage the use of Flexible Spending Accounts, which allow people to set aside funds to help meet medical expenses.”
- NICHR (October 2015). Paul B. Ginsburg, Chapin White, Christine Eibner, Sarah Nowak. Limiting Tax Breaks for Employer-Sponsored Health Insurance: Cadillac Tax vs. Capping the Tax Exclusion. NIHCR Research Brief No. 20. A new National Institute for Health Care Reform analysis compares the Cadillac tax to capping the tax exclusion on employer health benefits. The analysis found only modest differences in progressivity—or the degree to which higher-income people bear a higher tax burden—between the Cadillac tax and capping the tax exclusion, primarily because employers are likely to avoid a substantial portion of the taxes by restructuring health benefits, particularly in response to the Cadillac tax.
- RAND Corporation (October 2015). Chapin White, Sarah Nowak and Christine Eibner, Can the Cadillac Tax Be Made Less Regressive by Replacing It with an Exclusion Cap? Methods and Results, RAND Corporation, Santa Monica, Calif. (Oct. 8, 2015).
- Urban Institute (October 2015). The ACA’s “Cadillac” Tax Versus a Cap on the Tax Exclusion of Employer-Based Health Benefits: Is This a Battle Worth Fighting? (Robert Wood Johnson Foundation) “Both the ACA’s excise tax and a cap on the exclusion surely share some problems. They both affect some industries more than others: some industries face somewhat higher average costs because they have either richer benefits or a workforce with higher average health care costs (e.g. public sector employers, financial services and real estate industry employers, and unionized firms). Other evidence suggests that both policies would affect firms and their workers in the Northeast more than those in other regions because firms in the Northeast have higher health costs. And as noted, both approaches’ implications for use of medical care may vary significantly across family incomes and by the extent of medical needs. But no policy is perfect… In this circumstance, however, the diverse political support for limiting the exclusion should transfer to support for maintaining the ACA’s Cadillac tax. The two approaches would have nearly identical distributional effects, and keeping the excise tax would be easier and less risky than trying to gather sufficient political support to replace it with an exclusion cap or other policy that would raise at least as much revenue.”
- American Health Policy Institute (October 2015). T. Troy, D.M. Wilson, ACA Excise Tax: Cutting Family Budgets, Not Health Care Budgets. Key findings:
- Almost 90 percent of large employers are taking steps to try to prevent their company from having a plan that triggers the excise tax in 2018;
- Over 30 percent of large employers said they would have at least one plan impacted by the excise tax in 2018;
- Almost half of the employers that did not have plans hitting the excise tax in 2018 said they would have a plan that would be impacted by 2023;
- Almost 19 percent of large employers were already curtailing or eliminating employee contributions to flexible spending accounts (FSAs) in order to avoid triggering the excise tax;
- Almost 13 percent were already curtailing or eliminating employee contributions to health savings accounts (HSAs);
- Among employers who are going to reduce the values of their plans as a result of the excise tax, 71 percent of employers said that they probably would not provide a corresponding wage increase; 16 percent said they would.”
- Dobson, Robert H., and Stuart D. Rachlin (December 2014). What Does the ACA Excise Tax on High-Cost Plans Actually Tax? Milliman Client Report, Tampa, Fla. (Dec. 9, 2014). This analysis shows the age-gender adjustments in the Cadillac tax are inadequate, meaning that some employers will face the tax purely because of an adverse age-gender mix of employees.
- American Health Policy Institute (October 2014). Troy, T, Wilson, D M. The Impact of the Health Care Excise Tax on U.S. Employees and Employers. Key findings:
- From 2018 to 2024, the excise tax could cost 12.1 million employees an average of $1,050 in higher payroll and income taxes per year, if employers increase their taxable wages as they reduce the cost of health care benefits. Alternatively, these employees could see up to a $6,150 reduction in their health care benefits and little or no increase in their pay.
- Should employers increase the taxable wages of employees, something that is not clear in the current business cycle, a significant portion of the increase in take-home pay may be spent on higher out-of-pocket health care expenses as deductibles and out-of-pocket limits increase.
- Large employers subject to the excise tax in 2018 will pay an average of $1.0 million that year, and an average of $2.1 million per year from 2018 to 2024, or over $2,700 per employee.
- In 2018, the excise tax is anticipated to hit 17 percent of all American businesses, and 38 percent of large employers.
- Within twenty years, the impact of the excise tax will not be limited to just high value plans. By 2031, the cost of the average family health care plan is expected to hit the excise tax threshold.
For Cadillac Tax
- Bernstein, J. A Message to My Friends and Allies about Why Repealing the Cadillac Tax is the Wrong Thing to Do. (Washington Post, 11.12.15) “I stand up in defense of the Cadillac tax. You know the one, as I’ve visited the issue twice on these pages, first with a full-throated defense of this important revenue source for the Affordable Care Act, and second, having read many of your arguments against the tax, a 3/4’s-throated defense. The fact is, you make some strong points against the tax. But read on, as you may find I’ve got even stronger ones, especially given the reality of tax policy today and some ideas for compromise…here’s the fact that I fear you are seriously overlooking: the Cadillac tax isn’t perfect — no tax is. But it is on the books, and if you repeal it, you will not be able to replace it.”
- Cohn, Jonathan. The Obamacare Idea Conservatives Should Be Cheering, But Aren’t. New Republic (5.28.13) “It’s difficult to pinpoint how much the Cadillac Tax is responsible for these shifts, given that employers were looking for ways to shift costs long before Obamacare came long. The tax doesn’t start to phase in until 2018. And the Congressional Budget Office, in its most recent revision of projections on Obamacare, said that it now expects fewer plans to hit the tax threshold when it first takes effect. Still, employers are certainly talking about the tax. (I’ve heard the same chatter.) If employers are reducing their coverage in response, then—as Matthew Yglesias notes—it’s working precisely as the economists predicted it would.”
- Committee for a Responsible Federal Budget. (4.29.15) Let the Cadillac Tax Drive…Down Deficits and Healthcare Spending. “Repealing the tax is a step in the wrong direction; if lawmakers want to pursue reform, they could choose to further limit the subsidy for more expensive insurance plans. CBO estimated in 2013 that replacing the excise tax with a direct limit on the health exclusion set at the median premium would reduce deficits by $537 billion over ten years. With this policy, employers’ contributions to premiums that exceeded the median amount would be subject to income and payroll taxes. If lawmakers would rather do away with the Cadillac tax, though, they should focus on long-term savings that help bend the cost curve, whether they are delivery system reforms, cost-sharing reforms, or other efficiencies. Clean repeal would make getting both the budget and the health care system under control much more difficult.”
- Emanuel, Ezekiel and Kocher, Bob. Don’t Repeal the Cadillac Tax. New York Times (10.2.15) “Today, about half of all Americans get their insurance through their employer (or the employer of a relative) — and benefit from the tax exclusion. But the subsidy has created serious problems. For one thing, it is hugely regressive. The rich receive nearly triple the financial benefits from the tax exclusion than those with lower incomes because they are taxed at a higher rate and tend to have much more expensive health insurance. The health care tax exclusion is the single largest tax break in the United States, reducing federal revenue by more than $250 billion per year.”
- Garver R. How Scrapping the Cadillac Tax Will Drive Up Health Care Costs. (Fiscal Times, 10.2.15) ”From Hillary Clinton and Bernie Sanders on the Democratic side to key Republican lawmakers in Washington, including Sen. Dean Heller of Nevada, there is a growing bipartisan push to repeal the so-called “Cadillac Tax” on high-cost health insurance plans that is due to kick in in 2018 under the Affordable Care Act. The problem is that people who really understand healthcare economics – including those who have supported and those who have opposed Obamacare – say repealing the tax is a terrible idea… What should be clear is that the people who know more about how the tax code and healthcare economics than any lawmaker on Capitol Hill think the Cadillac Tax ought to be allowed to go into effect.”
- Mankiw, N. Gregory., Summers, Lawrence. Uniting Behind the Divisive ‘Cadillac’ Tax on Health Plans. New York Times (10.24.15). “One of us, a former member of the Obama administration, remains a fan of the president. The other, not so much. But we agree on one thing: The excise tax on high-cost health care plans, the so-called Cadillac tax, is good policy. Congress should side with President Obama and resist calls to scrap it.”
- Pauly, Mark. Of Cadillacs, Coinsurance, and the ACA’s Tax on Expensive Insurance Policies. Philly.com (10.23.15). “Of course, the last-minute political dealing when the ACA was passed was the reason why we got the clunky Cadillac tax rather than an alternative, such as a cap on the amount of health benefits that can be excluded from taxation. There is a great deal of room for improvement in the way the tax is structured, and it is not beyond the limits of human intelligence to waive or reduce the tax for low-income or high-risk people.Whether it is beyond the limits of our current-day political process remains to be seen—but at least the principle of preserving a policy that strikes at an inequitable and inefficient tax break, which the Cadillac tax makes a start at doing, should be respected.”
- Rampel, C. How the ‘Cadillac Tax’ Might Raise Your Income. Washington Post (10.1.15). ” This tax would probably help you get a raise. How, exactly? The chain reaction between Cadillac taxes and your paycheck is a little complicated and not terribly intuitive.”
- Van de Water, Paul. Excise Tax on Very High-Cost Health Plans Is a Sound Element of Health Reform. Center on Budget and Priorities. (11.10.09). “An excise tax on very high-cost health plans, which the Senate Finance Committee included in its health reform bill, represents a sound way to help pay for health reform. The excise tax finances nearly a quarter of the costs of the Finance Committee bill over the first ten years ($201 billion out of $829 billion) and makes a major contribution to the deficit reduction that the bill would achieve in later decades. It would help to slow the rate of health care cost growth, without which health care reform is not likely to be sustainable over time.”
- Yglesias, Matthew. Another Piece of Obamacare Is Working as Extravagant Insurance Plans Are Pared Back. Slate (5.28.13). Here’s another piece of good news for Affordable Care Act implementation that, for a variety of reasons, the White House is unlikely to trumpet—the most generous health insurance plans in America are getting less generous and the evidence suggests that the ACA’s ‘Cadillac tax’ on very expensive insurance plans deserves the credit. Or the blame. This may not sound like good news, but to health wonks it is.”
Against Cadillac Tax
- Beezley-Smith, D. Questioning Jonathan Gruber’s “Wage Growth” Promises. Journal of the American Association of Physicians and Surgeons (9.2.15). “The roughly 150 million Americans covered through employment weren’t told their tax-free benefits were being targeted nor that the Cadillac tax presented powerful incentives for companies to drop plans. They weren’t aware that the tax was designed ‘to eventually force every American with employer-based coverage onto the Exchanges whether they like it or not.’…We now know that employer-sponsored coverage is being intentionally eroded, and that employees are paying more for care that was much more affordable before the Affordable Care Act. In response, millions more are avoiding treatment and rationing medicine. Such sacrifice was confidentially considered necessary to finance the overhaul. But no one told the American worker.”
- Bivens, J. Excise Tax on Expensive Health Plans is an Unambiguous Pay Cut. Economic Policy Institute (10.7.15). “How confident should we be that wages will rise in response to a cutback in employer premium payments in an effort to avoid the tax? I’ve been indoctrinated enough as an economist to think this will likely be the case over the long run. However, the ability of workers to demand wages as recompense for accepting thinner health plans and lower employer premium contributions will depend on many things, including how close the economy is to full employment…Since 2007, health care costs have decelerated rapidly. This should have opened up a lot of room for faster wage gains in the post-2006 period. Yet inflation-adjusted wages after 2007 have fallen for the vast majority of American workers.”
- Clancy, Dean. Kill Obamacare’s Cadillac Tax. US News (7.24.15). “If you like your health plan, you can keep it. That is, unless you get it from your employer. In which case, you’re going to lose it. Sorry. Why? Because of the Cadillac Tax. That’s the impending federal tax on ‘excessive’ health insurance benefits. If you’re one of the 160 million Americans who relies on an employer for your health coverage, you can expect to lose that coverage within the next decade or so, thanks to this new tax. Enacted in 2010 as part of President Barack Obama’s Affordable Care Act, and scheduled to take effect in 2018, the Cadillac Tax is already causing employers to pare back health benefits. Formally, it applies only to ‘high-cost’ health plans. But it’s designed to snare all plans in time, which will bring the employer-based system to an end.”
- Conover, Chris.
- Obamacare’s Three-Legged Stool Of Deception Regarding Employer Health Plans. Forbes.com (11.24.14). “The first leg is that the Cadillac tax is paid by insurance companies, when in reality it is paid by employees. The second leg is that the Cadillac tax is aimed at ‘lavish’ high cost plans, when in reality it is designed to eventually hit virtually every employer health plan (even those with lower-than-average costs). The third leg is that the Cadillac tax is functionally equivalent to a reform long championed by conservatives: a cap on the tax exclusion for employer-sponsored health insurance. For reasons explained below, that is the most pernicious deception of all.”
- Why Conservatives Shouldn’t Cheer the Cadillac Tax (and Neither Should Anyone Else) Forbes.com (6.5.13). “Jonathan Cohn would like you to believe that conservatives are so irrational in their hatred of Obamacare that they even despise parts of the law that should make them cheer, such as the Cadillac tax on high cost health plans. Mr. Cohn is correct in asserting that ‘writers like James Capretta and Robert Moffit have long called for reducing or eliminating the tax breaks for employer sponsored insurance.’ But there’s a world of difference between how conservatives would cap or eliminate the current employer tax exclusion and the Cadillac tax, which even Mr. Cohn concedes ‘isn’t really a tax so much as a convoluted attempt to undo an existing tax break’ and which even progressive blogger Matt Yglesias describes as ‘slightly kludgy.'”
- Cooper, P. The Cadillac Tax Is a Poor Solution to a Real Problem. (e21, 10.1.15) “The tax is deeply unpopular—it has been delayed to 2018—and with Democratic members of Congress under heavy pressure from labor unions who oppose the tax, it could be repealed altogether. While the tax is certainly a poorly-designed policy, it does have a real purpose, and lawmakers should have an alternative solution ready before they repeal it.”
- Gould, Elise and Josh Bivens. Two Experts Make the Case Against Obamacare’s Controversial “Cadillac Tax”. Vox (10.20.15) “The problem here, Gould and Bivens argue, is that most research shows patients just aren’t that great at discerning the difference between necessary and unnecessary care. And in a way, that makes intuitive sense: We often go to the doctor when we’re trying to figure out if something is wrong. Gould and Bivens cite research showing that patients with higher cost sharing are less likely to take the drugs that doctors prescribe, and that higher copayments can worsen the health of those who are already sick. New research also strengthens their point: A new study published last Monday looked at what happened to about 75,000 people who switched from a health plan with no deductible to one with a $3,750 deductible. It found that patients reduced care across the board, both services thought to be possibly unnecessary (like imaging scans) and those thought quite necessary (mental health visits). It’s likely that wasteful services will disappear a bit if health plans become skimpier. But the best research we have suggests that will be accompanied by a drop in necessary health care, too.”
- Troy, T. The ‘Cadillac Tax’ Makes Everyone Sick: An ObamaCare Levy Made to Limit Workplace Health Insurance Means Maybe You Can’t Keep Your Plan Either. (Wall Street Journal, 10.12.15) “Providing some kind of limit to the amount of the tax advantage employers get for providing health care to employees could make some sense if it were designed the right way—for instance, by making some portion of employer-provided health benefits taxable above a certain income ceiling, without penalizing lower-wage employees. But the consistent unpopularity of the proposed excise tax and the bipartisan efforts to eliminate it reveal that American people of all incomes understand better than the 101 economists the costs of the Cadillac tax and the damage it would do.”
History of the Excise Tax
- Obamacare: Cadillac Tax. (Full Measure, 3.27.16) Video explains the roles of Jonathan Gruber and Ezekiel Emanuel in the creation of the excise tax and the likely future elimination of company health insurance benefits.
- The Man Who Discovered the Gruber Video, Rich Weinstein. Videos provide a detailed history of the genesis and purpose of the Cadillac tax.
- How Obama Learned To Stop Worrying And Love The Obamacare Bomb. (Exposing Obamacare blog, 4.6.15) “In his first presidential campaign, Obama repeatedly maintained that he was dead-set against taxation of health insurance benefits. He even chastened his opponent, Senator McCain, for proposing that Americans receive tax credits instead of tax-free insurance benefits. ‘This is your plan, John: for the first time in history, you will be taxing people’s health care benefits.’ Ezekiel Emanuel, special advisor for health policy during the law’s creation, gives us important insights into how, in the summer of 2009, Obama decided campaign promises weren’t as important as was more money in the federal coffers.”
- The Hill. (11.2.15) “The Cadillac tax split lawmakers and economists from the earliest days of work on the Affordable Care Act (ACA) and has remained a sticking point through the end. Back in 2009, the tax was the target of an intense lobbying campaign led by the unlikely bedfellows of AFL-CIO and the U.S. Chamber of Commerce. Shortly before final passage, a group of 173 House Democrats — including Courtney — wrote to then-House Majority Leader Nancy Pelosi (D-Calif.) opposing the tax. As a concession then, Courtney helped negotiate a five-year delay of the provision, which he described as ‘more of a truce.’ ‘It was well understood that it was going to be revisited,’ he said.”
- Cadillac Tax Feud: House, Senate Dems Tangle (3.8.10) “House leaders are growing increasingly concerned that the Senate’s mechanism for funding legislation — which relies on taxing high-end insurance policies — represents not just bad policy but could also be disastrous at the polls. The anxiety stems from the belief that a wide swath of union workers whose health care plans would be affected by the so-called ‘Cadillac tax’ will be sufficiently upset by the time of the 2010 elections. Lawmakers who spent 2008 campaigning against this excise tax, meanwhile, will have the inevitable task of explaining why they reversed course.” Huffington Post, Stein, S.
- Kerry’s Excise Tax on “Gold-Plated” Health Insurance Policies. (8.5.09) “Senator Kerry’s proposal of an excise tax is not the same as reforming the tax exclusion. Faced with union opposition to capping the tax exclusion Senator Kerry suggests that Congress instead impose a new excise tax on health insurance policies that exceed a specific amount.” Haislmaier, Edmund F. Heritage Foundation WebMemo #2578.
- Joe Antos. Obama Targets Wrong Tax for Health Reform, May 30, 2009. [Full Text (html)]
- Gold J, ‘Cadillac’ Insurance Plans Explained, Kaiser Health News, March 18, 2010.
- Health Policy Brief: Excise Tax on ‘Cadillac’ Plans, Health Affairs (9.12.13).
- Cadillac Tax Memo – Sept 25 2015 FINAL.” Memorandum For Hillary Rodham Clinton, 9.25.15.