Two Options to Improve the Cadillac Tax


Congress is eager to repeal the Cadillac Tax. The House just voted 419 to 6 in favor of the idea. The bill now moves to the Senate.

What is the Cadillac Tax?

ObamaCare created the so-called “Cadillac Tax” to reduce the incentive to purchase luxury health insurance policies as a means to avoid paying income and payroll taxes. Since healthcare insurance provided by employers is not taxed, this incentivizes employers to provide more expensive health insurance policies rather than higher wages. This not only reduces government tax revenues, it encourages lavish spending on healthcare.

To curb this incentive, ObamaCare placed a 40% tax on any insurance policy for an individual that exceeds $11,200 per year or $30,100 per year for families. The tax is paid by the employer, but the impact on the employee is the same.

Of course this is unpopular with workers and unions and has been from the beginning. The date for implementation of the tax has been delayed twice already, now to take effect January 1, 2022.

Why not repeal the tax?

The repeal of this tax will cost the government about $200 Billion over the next ten years. That’s a lot of tax revenue. But keeping the tax is unpopular with workers, employers, and politicians. The only real advocates for the tax are healthcare economists and those concerned about the mounting federal deficit. Those people don’t cast many votes.

Two Other Options

But there are other options. The first of these is advocated by Brian Blase, writing in The Wall Street Journal. His option is intended to incentivize workers to open Health Savings Accounts (HSAs) with money that doesn’t count toward the Cadillac Tax limit. HSAs have been shown to reduce healthcare spending by encouraging consumers to shop for better deals. Since they control the spending of their healthcare dollars, they benefit by finding better value for their healthcare dollar.

Blase would exempt both employer and employee HSA contributions from the calculation of the value of the plan for purposing of enforcing the Cadillac Tax. Fewer employees would face the tax ceiling, fewer dollars would be spent on healthcare, and more transparency in healthcare spending would result in lower costs and higher quality.

John C. Goodman, healthcare economist writing in Forbes, advocates another option. Goodman favors a dollar-for-dollar tax credit up to the amount of the tax subsidy employees have been getting for the tax exclusion. For example, if you’re in a 30% tax bracket and you get a $20,000 healthcare family policy from your employer, you’re getting a $6000 subsidy from the federal government. Goodman would give you a $6000 tax credit to purchase your healthcare policy. The remainder of any insurance premium would have to be paid with after-tax dollars.

When faced with this choice, employees would probably prefer more take-home pay. They would rather compromise on the luxuries of their healthcare policy and have more money in their pocket. This means more tax revenue for the government and less wasteful spending on healthcare by the employees.

Actually, Goodman favors a fixed tax credit for all Americans, regardless of income. He estimates a tax credit of $2,500 for individuals and $8,000 for a family of four would allow almost everyone to obtain insurance equivalent to a well-managed Medicaid plan. Additional funds could be spent to obtain insurance that gives more options.

He also advocates that states should have the freedom to give everyone the opportunity to use their credit to buy into Medicaid (similar to the Public Option progressives favor) but should also be able to give everyone in Medicaid the opportunity to obtain private insurance instead (which is favored by conservatives.)These changes would:

  • Eliminate all perverse incentives to over-insure
  • Eliminate the perverse incentives not to hire and not to work
  • Approach the goal of universal coverage


Repealing the Cadillac Tax is not a good idea. Let’s replace it with a better option.