The So-Called “Cadillac Tax” Must Go

Share |

The Affordable Care Act contains the first-ever tax on employee health benefits.  Starting in 2018, it will require companies to pay a tax of 40% on the value of the health benefits provide to their workers above a certain threshold.  For a single person, the limit is $10,200; for families, it is $27,500.

This so-called “Cadillac tax” was aimed at reducing health costs, but it would affect far more health benefits than originally thought, generally undermining employer-provided health care efforts.  Under the plan as proposed for implementation, all the large and small tech and digital media companies in SIIA now face the difficult choice of whether and how much to scale back the health benefits they provide to their workers in order to avoid the tax.

Fortunately, momentum is gathering in Congress to do something about the problem.  In February, Rep. Frank Guinta (R-NH) introduced legislation to “Ax the Tax on Middle Class Americans' Health Plans.”  In April, Rep. Joe Courtney (D-CT) introduced his bill to repeal the “Middle Class Health Benefits Tax.”  Just last week, on September 24, Sens. Sherrod Brown (D-OH) and Bernie Sanders (D-VT) introduced their legislation to repeal the tax on health benefits, with 11 original co-sponsors including Sen. Patrick Leahy (D-VT).  Congress should pass legislation that repeals or significantly modifies the implementation of this tax.

For generations, the government has encouraged companies to provide health care benefits to their workers by allowing them to deduct the cost of coverage.  As a result, many Americans received health insurance for the first time.  The new tax on health benefits reverses this and penalizes the provision of health care benefits.

When Congress was considering the program, it was described as modest, affecting at most 3% of the most luxurious plans that benefited only high-income corporate officials.  Hence, the misleading name, Cadillac tax.

However, the tax will affect more than just the richest 1%.  According to the Towers Watson international consulting firm, "roughly half of large U.S. employers will begin to hit the excise tax in 2018." By 2023, 82% of these firms will pay the tax.  And it will affect the plans for working Americans, not just the highest-paid corporate officials.

Inflation adjustment guarantees the spread of the tax.  Health care costs continue to grow at over 5% per year, much faster than consumer inflation generally.  But the thresholds for the plan grow much more slowly – at the rate of the consumer price index (roughly 2%) plus one percentage point.  With this imbalance, every company in America providing health benefits will soon be covered – unless they reduce the benefits substantially.

And it is not just health insurance.  Also currently on track for implementation, the tax will cover wellness programs, on-site medical clinics, employee contributions to health savings accounts, health reimbursement accounts, flexible spending accounts, and vision and dental care.  The application to wellness programs seems especially perverse, since these programs are aimed at reducing health care costs.

The program was designed to curb “excessive” health insurance programs to reign in skyrocketing health care costs, but it clearly goes far beyond what Congress intended and in some ways operates against its own objectives.

More than 150 million Americans receive health care benefits from their employers.  The tax on health benefits will have a negative impact on the long-term viability of this employer-sponsored health insurance system.  Smart companies want to invest in wellness programs and on-site clinics to control health care costs.  The tax on health benefits punishes them for this efficiency.  Congress needs to revisit this issue now and repeal the tax or significantly modify its implementation.

Mark Mark MacCarthy, Senior Vice President, Public Policy at SIIA, directs SIIA’s public policy initiatives in the areas of intellectual property enforcement, information privacy, cybersecurity, cloud computing and the promotion of educational technology. Follow Mark on Twitter at @Mark_MacCarthy.