Should Republicans Delay the Cadillac Tax?

 

Republicans (except Donald Trump) are determined to repeal ObamaCare and rightfully they should be. It has been a disaster from the beginning when it was passed without a single Republican vote.

Recently they have received Democratic support for delay of one provision of the law, the so-called “Cadillac Tax.” This provision calls for a tax of 40% on all healthcare plans with individual premiums exceeding $10,200 for individuals or $27,500 for families beginning in 2018.

The purpose of this tax is to begin to recapture some of the lost tax revenue from the tax exclusion of insurance premiums paid by employers that has been in effect since shortly after World War II. This tax exclusion today has grown to over $500 Billion a year.

Health Care Entitlements 2009 - 2017

Although the tax will be paid by the insurance companies, the real cost will be passed along to those who purchase the plans, mostly employers. But since employers will have less money to raise wages if they spend it on healthcare premiums, the actual payers of the tax will be workers – in the form of lower wages than they would have enjoyed without the tax.

I wrote three posts to explain the ramifications of the Cadillac tax which you can review (Understanding the Cadillac Tax – Part I, Part II, and Part III.) In those three posts we learned three important points:

  • Although the tax will only affect 15% of plans in 2018, it is projected to affect 76% of all plans by 2029.
  • It will affect large companies more than small ones, and will impact lower-wage earners more than higher-wage earners.
  • It will decrease access to healthcare by increasing the price of treatment

 

Finally, we learned from Chris Conover that a tax exclusion cap would be a better way to restrict the amount of healthcare insurance premium that is not taxed because it would impact lower-wage earners less (who can’t afford it) and higher-wage earners more (who can).

Delaying the Tax

That brings us to today’s political climate where big business and labor unions are pressuring politicians to scrap the Cadillac tax. Big business doesn’t want to pay the tax because large employers will be forced into large expenditures since the ObamaCare Employer Mandate dictates they must provide insurance for employees for pay fines of $2000 per employee per year. Labor unions enjoy generous benefit packages with expensive healthcare insurance premiums so they don’t want the tax to lower future wage increases.

Democrats resisted the pressure of labor unions, their natural constituents, when the law was written. But now they seem amenable to delaying this provision of the law with the help of Republicans who control Congress. Currently there is a bill in Congress that would delay the implementation of this tax for two years. Should the Republicans go along?

Avik Roy, writing in Forbes, correctly points out that literally every Republican proposal to replace ObamaCare contains something similar to the Cadillac tax. This would include proposals by Governor Bobby Jindal, the Burr, Hatch, Upton plan, and Roy’s own plan called Transcending ObamaCare. Each plan tries to gradually withdraw the tax exclusion for healthcare insurance to level the playing field between employer-provided insurance and those individuals who purchase their own plan.

Roy says delaying the Cadillac tax will only increase the nation’s tax burden and trade the long-term interests of taxpayers for short-term political gain. He points to the reality that the entirety of the growth in federal spending, as a share of our economy, is health care. It is the taxpayers who are left with over $18 trillion in debt with interest payments rising even faster than healthcare spending.

Spending Projections - CBO

All you really need to know about the bill to delay the Cadillac tax plan is that Hillary Clinton supports it. That should tell you that this is really all about pleasing the labor unions to garner Democratic support for her candidacy.

Republicans should be thinking about what’s good for the taxpayers, not the labor unions. A tax exclusion cap, as suggested by Chris Conover, would be an improvement over the Cadillac tax, as would a standard deduction for all purchasing of health insurance, as suggested by Avik Roy. But a delay will only serve political interests and not the American taxpayer. The people deserve better.

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