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'Cadillac' tax repeal gains momentum

'Cadillac' tax repeal gains momentum

Momentum is building in Washington to repeal the Affordable Care Act's tax on high-cost employer health plans — a move that would undo policymakers' previous goal of restructuring a tax exclusion that insulates all employees from experiencing most of the pain of rising health care costs.

The so-called Cadillac plan tax will go into effect in 2018. Employer-sponsored plans with annual premium costs above $10,200 for individual coverage and $27,500 for family coverage will face a 40% excise tax for the amount over the threshold. Those thresholds will increase annually with the consumer price index instead of the rate of health care inflation, which over the next decade means far more plans will get thrown into the taxable category.

Companies and unions that over the years funneled taxable wage increases into maintaining a generous level of untaxed health benefits lost their battle to keep the Cadillac tax out of the ACA. Now they have launched a lobbying group called the Alliance to Fight the Forty to push for two bills repealing the tax that are winning bipartisan support from members of Congress as it heads into an election year.

Taxing dilemma

Revenue to be raised from Cadillac tax over next 10 years: $87 billion

Federal tax revenue lost in 2014 due to employer insurance tax exclusion: $263 billion

Their rallying cry is that the tax will mostly cut the health benefits of middle-class families. “The excise tax will punish people living in higher-cost areas with 'Ford Focus' level plans,” said Rep. Joe Courtney, D-Conn., a sponsor of one of the bills.

In recent years, a number of Democratic and Republican policymakers have agreed with economists that an overhaul of the tax exclusion for employer-provided coverage is overdue. Repealing the Cadillac tax — a start in ending that tax break — would keep the status quo.

Since World War II, all health benefits offered by an employer have been exempt from federal income and payroll taxes. That encouraged employers to beef up health benefits instead of raising wages. Experts say that contributed to overutilization of health care since employees are insulated from most of the increase in health care costs.

The tax exclusion also puts a huge dent in the country's taxable income base. The federal government gave up $263 billion in income and payroll taxes in 2014 because of the tax exemption on employer-sponsored health insurance, according to the Joint Committee on Taxation. It's the nation's largest tax preference — even larger than the deduction for home mortgage interest.

MH Takeaways

Despite a growing lobbying push to repeal the excise tax on high-cost health insurance plans, success is unlikely unless proponents come up with additional revenue to subsidize individuals buying plans on the exchanges.

When Sen. John McCain, R-Ariz., ran for president in 2008, he proposed eliminating the tax exclusion and using the money to offer tax credits for individuals purchasing health insurance. There has been bipartisan support for the idea, including from former Republican Sen. Tom Coburn of Oklahoma on the right to many Democratic leaders on the left, who say the tax exclusion is “inequitable” and “regressive” since wealthier people in higher tax brackets get a bigger deduction from untaxed benefits.

“Economists have been fighting for this on a united front for a long time now,” Mr. Adler said. That's why the Cadillac tax was built into the ACA and had some bipartisan support. It was seen as logical economic policy and a step, albeit small, toward minimizing that exclusion.

Erin Trish, a health policy professor at the University of Southern California, said most economists say the health care system would function better without the tax exclusion for employer-sponsored insurance. But total repeal is still viewed as a political third rail.

“When you start to talk about this to an average person, they don't necessarily want to pay more taxes on their health insurance benefits,” Trish said. “The vast majority of Americans benefit from this.”

The Cadillac tax will generate about $87 billion from 2016 through 2025. But that's just a sliver of the amount that could be raised if the tax exclusion were eliminated entirely.

Experts view repeal as unlikely with President Barack Obama in office and with no established plan to replace the revenue, which is used to subsidize the ACA coverage expansion. “One of the primary objectives of the Affordable Care Act was to expand coverage to many people that don't have it,” said Mike Mascolo, a national employee benefits practice leader at Wells Fargo. “Regardless of what side of the political spectrum you're on, the math suggests if you're going to offer people a benefit, we have to find a way to pay for that.

“It's going to be very difficult to repeal this,” he said.

Bob Herman writes for Modern Healthcare, a sister publication of Business Insurance.