Repealing the so-called Cadillac tax without replacing it with a workable alternative would mean $87 billion less in federal revenue over a 10-year time period, which represents a large source of funding for the Affordable Care Act’s (ACA) coverage expansions. A new report compares the financial impact of the Cadillac tax and compares it to the effects of a cap on the tax-free status of employer and employee contributions to health insurance premiums. The latter has been supported by many analysts and policymakers. The authors find the two taxes to have very similar implications. The Cadillac tax is designed to tax health benefits over $10,200 for an individual and $27,500 for families in 2018. The report was prepared by researchers at the Urban Institute, with funding from the Robert Wood Johnson Foundation.
In recent weeks, presidential candidates from both parties have called for the repeal of the Cadillac tax, joining members of Congress, labor unions and employer groups. Criticisms of the tax designed to reduce health care spending stem from concerns that it will lead to reduced health benefits for some workers as most affected employers reduce plan benefits to avoid the tax. Researchers note that despite its wide disapproval, less than 12 percent of U.S. households would be subject to the tax in 2020. The number of households affected would increase over time, however.
One alternative to the Cadillac tax is to replace it with a cap on the amount employers and employees can contribute to their health insurance premiums tax-free, meaning any health benefits above a certain threshold would be subject to income and payroll tax just like wages. This policy, which would have the same effects for most workers as the Cadillac tax, has had broader support and could fill the funding void left by repeal of the Cadillac tax. However, the report authors note that in this period of intense partisanship, it would be a gamble to repeal the Cadillac tax and expect bipartisan cooperation to quickly pass an alternative that would help fund the ACA’s Medicaid expansion and marketplace tax credits.
“The much maligned Cadillac tax would in reality function very much like a cap on the tax exclusion for health insurance, which has had bipartisan support for many years,” said Kathy Hempstead, who directs coverage issues at the Robert Wood Johnson Foundation. “There is broad agreement that limiting this tax exclusion would provide significant revenue, aid cost containment efforts, and eliminate an incentive that disproportionately benefits higher income workers.”
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To speak with an expert about the report, please contact Haydn Bush at [email protected] or 872-208-7896.
