Understanding the ObamaCare Cadillac Tax – Part II


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.

In Part I of this series, I discussed recent research projections that conclude the Cadillac tax will only affect about 15 % of employer-sponsored plans in 2018, but by 2028 it will impact over 75% of plans. So what started out as a tax affecting only those with the most expensive healthcare insurance, will eventually affect nearly everyone.

But the impact will be disparate; it will depend on several variables including whether or not you are an employee or employer, the size of your company, and finally your level of income. Today we’ll discuss these different impacts.

Impact on Employers and Employees

Employers have been providing health insurance as a relatively low cost means of attracting workers since the post WWII era when wage controls made it impossible to offer higher wages. The tax exclusion on health insurance benefits has made it cheaper to pay workers more by offering them better health insurance rather than higher wages.

But now ObamaCare’s Cadillac Tax makes it more expensive to offer higher-priced insurance policies if they exceed the tax thresholds. Although the 40% tax is actually paid by the insurance companies, the added cost will be passed along to the employers who purchase the insurance. If employers pay more for health insurance they have less money to pay in higher wages. Ultimately, it is the employees who pay the tax through lower wages than they would have received if not for the tax.

Why not eliminate the health insurance benefits to avoid the tax? Small firms can do this because they are not subject to the Employer Mandate of ObamaCare, which affects all employers with more than 50 full-time employees. However, they may lose valuable employees if they offer them fewer benefits. They can make up the difference in higher wages, but both the employer and the employee will be subject to taxes on these higher wages.

Larger firms (over 50 full-time employees) have a more difficult choice. If they eliminate healthcare benefits, they will be subject to the Employer Mandate tax of $2000/employee/year. If they cut back on benefits to keep under the tax, they may lose valuable employees who might change jobs. Moreover, as the last post showed, even the lower cost healthcare policies today will eventually exceed the tax threshold and they will be subject to the Cadillac Tax.

This puts large companies in a real bind versus their smaller counterparts. It creates a large disincentive for companies to grow which will perversely affect the employment market of the future and the growth of our economy.

The Cadillac Tax Unfairness

The Cadillac Tax is also unfair in its impact on employees. Chris Conover, writing in Forbes, explains how low-income workers are disproportionately affected.

The Cadillac Tax imposes a tax of 40% on “excess premiums” for all workers regardless of income. Thus a minimum wage janitor will be paying the same 40% tax as the CEO making $1 million. This 40% tax is paid by the low-income worker through lower wages, even though he may pay no income taxes on his low wages.

Conover suggests a better solution is a cap on the tax exclusion for health insurance. This would retain the incentive to restrain spending on more expensive health benefits but would treat employees more fairly. With this cap, the minimum wage janitor would pay only 15.3% (FICA payroll taxes for Social Security and Medicare) whereas the CEO might pay taxes in excess of 50%.

Furthermore, since the Cadillac tax does not eliminate the tax exclusion, it “claws back” some of the tax benefits generated by the exclusion. Thus, the minimum wage worker would still get their 15.3% benefit from the exclusion, but then would have to pay back a 40% excise tax. The net tax paid by such workers would be 24.7% (40% – 15.3%). Likewise, the CEO would still get a discount of 50 cents on the dollar for their health insurance coverage (paid by the U.S. taxpayer), but would only have to pay back 40cents.

In other words, a cap on the tax exclusion achieves the same benefits as the Cadillac tax without the unfair treatment of low-income workers.

Thus far, we have learned that the Cadillac Tax will eventually affect nearly everyone, it will affect large companies more than small ones, and it will affect low-income workers more harshly than high-income workers. Next post we will discuss the politics of the Cadillac tax.

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