Does Delaying The Cadillac Tax Spell The Beginning Of Its Demise?

The “Cadillac tax” is not dead yet. But Congress put that key piece of Obamacare’s cost controls on life support this week by including a two-year moratorium on its implementation within a larger tax package deal announced Tuesday evening.

The provision wasn’t a major surprise, considering that lawmakers on both sides of the aisle had overwhelming come out against it. But it is a disappointing development to the policy-wonks and economists who continue to defend it and warn against attempts to undermine it without a measure to replace it.

The question now is what happens now to the tax, and whether the delay is just that — a delay — or if this provision is the beginning of a pattern where implementing it is continually pushed off.

“A delay should not be taken as an equivalent of an repeal,” Henry Aaron — an health care expert at Brookings — told TPM.

But the Cadillac tax’s fate will ultimately depend on who is in the White House and controlling Congress after the next election, and it’s hard not to see the momentum building against it. The 2016 Democratic frontrunner Hillary Clinton opposes it, while Republicans are promising a full-scale dismantling of Obamacare. By a 90-10 margin, the Senate in a show vote this month approved its outright repeal.

For now, the tax — a 40 percent levy on employer-sponsored health care plans after they exceed a certain threshold — will go into effect in 2020 instead of 2018. If not it’s pushed off again, its positive effects will be — at best — delayed.

The purpose of the tax was three-fold. For one it was a revenue-raiser that would help subsidize Obamacare benefits programs like the Medicaid expansion and the marketplace subsides.

But just as important, if not more, the tax was supposed to address what has long been considered a problem by lawmakers and policy wonks across the political spectrum: the exclusion of employer-sponsored health care plans from payroll and income taxes.

Because health benefits are not taxed, companies are incentivized to offer — and workers are incentivized to accept — more expensive health plans in lieu of higher wages. While in theory everyone wants the most generous plan they can get, such a system comes at a cost to low wage workers — who might prefer the higher wages over generous plans — and the government, which loses tax revenues.

“The government is in effect subsidizing that insurance because it’s not making you pay taxes on it,” Larry Levitt, vice president at the Kaiser Family Foundation, told TPM. “If you’re high income and in a very high tax bracket, the government is subsidizing a higher percentage of your health insurance than if you’re lower income and in a lower tax bracket.”

In this sense, the Cadillac tax is meant to make the tax system a little less regressive.

Furthermore, the tendency towards expensive plans is also believed to be a contributing factor in the growth of health care spending, and thus, if employers were encouraged to scale back on benefits, it could curb health costs.

“Most economists think that if health plans were taxed the way income is, and employees had to chose whether they wanted benefits or wages, they would tend to chose wages more often and limit the benefits to the things that are obviously more necessary,” said Alice Rivlin — a former director of the White House Office of Management and Budget and founding director of the Congressional Budget Office — now also at Brookings.

Economists can’t say without a doubt the expectation of the Cadillac tax was contributing to the slow down in the health care spending growth already being seen in recent years. But they believe companies were already preparing for it by scaling back plans.

“We do see a movement towards health insurance plans that are intended to promote more cost savings. It does look like we have had some progress on cost control,” Martin Gaynor, a professor of economics and health policy at Carnegie Mellon University, told TPM. “I do worry a little bit that this [delay] is a little, in effect, taking our foot off the gas pedal.”

Each year the government waits to implement the Cadillac tax, the larger the sticker shock is to putting it into effect, assuming that nothing is changed about its structure. That is because the threshold for which plans are subject to the tax, as crafted in the original ACA, rises at the rate of inflation while premiums tend to rise much faster.

“You end up with this wedge where over time more and more employer plans become subjected to the tax and the revenues start growing very fast as that happens,” Levitt said. “If the tax was really only hitting truly Cadillac plans there would be opposition but it would somewhat tempered. But the reality is the tax will hit essentially all employer-provided heath plans.”

Because of that and other policy realities, some economists are hoping that lawmakers will settle on an alternative to the Cadillac tax that may be even better at achieving its goals.

“Advocates of the ACA and its components can treat this [delay] as a major defeat. But I think that would be a mistake,” Aaron said. “I think it’s unfortunate but if it gives time to develop an alternative that has broader acceptance than the Cadillac tax that accomplishes the same goal, something good can come from this delay.”

The political environment for doing anything that appears to prop up Obamacare may be toxic as long as the GOP wields some power in Washington. But Republicans might be more amenable if replacing it was approached from the perspective of a tax issue, rather than a health care issue (while still keeping the dual goals in minds), where the focus is ending or capping the health plan tax exclusion.

“It’s been a pretty standard Republican tax reform for a quite a long time,” Rivlin said of addressing the exclusion for health plans. Sen. John McCain (R-AZ), for instance, proposed eliminating the tax exclusion during his 2008 White House campaign. It could also be capped or gradually phased out in time to weaken the blow.

But taxing health benefits is not an easy sell, politically, and a large part of why so many lawmakers are pushing to repeal the Cadillac tax.

“I don’t care who the politician is and what party they’re in, simply getting rid of this without putting something else in its place is irresponsible,” Gaynor said. “Politicians have to step up and do what’s best for the country, even if it’s not politically popular.”