Understanding the ObamaCare Cadillac Tax – Part I

 

ObamaCare has imposed over $1 Trillion in new taxes. One of these is the so-called “Cadillac Tax” on insurance premiums that begins in 2018. This excise tax will be assessed on all individual insurance premiums over $10,200 and on family policies over $27,500. The tax is 40% on any amount that exceeds these limits. Although its implementation is over two years away, many on both sides of the political spectrum are worried about its impact.

The tax is actually paid by the insurance companies, but the impact on the insured is ultimately the same as if they paid it themselves. As ObamaCare co-architect Jonathan Gruber famously noted, ““We just tax the insurance companies, they pass on higher prices that offsets the tax break we get, it ends up being the same thing. It’s a very clever, you know, basic exploitation of the lack of economic understanding of the American voter.” This was one of many deceptions of the American people Gruber bragged about in his candid remarks that were caught on video-tape.

In another video on the same subject Gruber explained his intent was to get rid of the tax-exclusion currently enjoyed by employer-provided health insurance. He estimated the amount of tax revenues forgone because of this exception to the usual rules for taxing compensation is at least $250 Billion per year.

Rather than simply take away the exclusion, which would be regarded as a huge tax increase on people, he concocted this alternative to deceive the voters. He explained that the only way to get rid of the tax preference for employer-sponsored insurance was “by mislabeling it, calling it a tax on insurance plans rather than a tax on people, when we all know it’s a tax on people who hold those insurance plans.”

Curiously, however, some Republican alternatives to ObamaCare have embraced the Cadillac tax with slight modifications. Even some conservative pundits have praised this controversial component of the new healthcare law.

In today’s post, and others to follow, we will discuss the Cadillac Tax in more detail. What are its benefits and its weaknesses? Should we retain this tax in an ObamaCare alternative or is there a better way? These are important questions that deserve answers.

The Cadillac Tax Impact

The pre-ObamaCare tax treatment of insurance policies has been unequal since the 1950’s. In the post WW II era of wage and price controls, employers were limited in their ability to attract new and better employees with higher wages. To offset these limitations, employers began offering health insurance benefits as an incentive to attract better workers. The IRS did not treat the cost of the insurance policies as extra income. Those who purchased their insurance as individuals apart from an employer did not enjoy this tax exclusion. This unfair and unequal tax treatment of insurance premiums has continued to this day.

ObamaCare imposed the Cadillac Tax as a method to discourage employers from increasing spending on insurance benefits as means of avoiding higher taxes. By imposing the Cadillac Tax on amounts above the limits, the Obama administration hoped to lower expenditures on health insurance, which they falsely labeled “lower costs” to support their narrative that ObamaCare “bends the cost curve” of healthcare.

When ObamaCare passed Congress in 2010 (without a single Republican vote), most people thought the Cadillac Tax would not affect them. Unions were troubled when they realized their generous healthcare benefits might be curtailed, but most workers had more modest healthcare policies that would not be taxed. Now, however, comes shocking news that eventually nearly everyone will be impacted.

Chris Conover, writing for Forbes, explains that the Cadillac Tax, by design, eventually will hit virtually all Americans with employer-provided coverage. Gruber understands all this, too, and even acknowledges that the use of the term “Cadillac tax” is deceiving. He admits, “Over time it’s gonna apply to more and more health-insurance plans. . . The tax that starts out hitting only 8% of the insurance plans essentially amounts over the next 20 years (to) essentially getting rid of the exclusion for employer-sponsored plans.”

 

Conover and Gruber are apparently correct, as recent research projections conclude. Below is a chart put together by former Senate Majority Leader Bill Frist (R –TN):

Cadillac Tax Thresholds

The chart shows that in 2018 only about 15% of employers will be impacted by the Cadillac Tax. But by 2029 the tax will impact 76% of employers.

  • These projections are nearly identical to those of Professor Bradley Herring of the Johns Hopkins Bloomberg School of Public Health and Lisa Korin Lentz, who estimate that the tax will affect 16% of health plans in 2018 and roughly 75% of plans by 2028.
  • Kaiser Family Foundation estimates that 26% of employers would have at least one plan that would be subject to the tax in 2018, climbing to 42% by 2028.
  • Towers Watson surveyed employers and projected 82% expect to hit the Cadillac Tax threshold by 2023.
  • Even The New York Times reported in December 2014: “By 2020, about 90% of American workers who now receive health insurance through their employers will be shifted to government exchanges created by the health law, according to a projection by S&P Capital IQ.”

 

So it is clear that what started as a provision of the law unlikely to impact all but the most expensive healthcare policies, will soon affect nearly all employer-provided insurance, and many individual policies as well.

How could this happen? Conover explains the dollar thresholds used to determine which plans are subject to this tax will be indexed using the Consumer Price Index + 1 percentage point in 2018 and 2019 and CPI only thereafter. However, the actual rate of increase in premiums for employer-sponsored coverage over the past 12 years has averaged more than 3-4% a year above inflation.

Thus, for a $27,000 family plan that initially escapes the tax, more than $1000 would be subject to tax just one year later, more than $2000 two years later, etc. So not only will more and more health plans be subject to the tax, but the dollar amount of such plans subject to the tax likewise will rise inexorably.

The real impact of the Cadillac tax depends on whether you are an employee or employer, small or large company, and low or high-income worker. We’ll discuss these different impacts in the next post.

 

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