Caddy Tax v Cap of Tax Exclusion in My Mostly Unread Book

I was leafing through my mostly unread book “Balancing the Budget is a Progressive Priority” thinking about why it was mostly unread (I think it was quite good, and I was insisting that both sides needed a health reform deal in Sept. 2011,even before the first SCOTUS case), and also looking at what I had written about my proposal of replacing the cadillac tax with a more straightforward capping of the tax exclusion of ESI, in light of the Grubergate stuff.

On the first question, the book holds that a deal (and another and so on; we will never be done) on health reform is needed to get to a long range sustainable budget. Health care costs are key to this goal, but instead of framing it this broadly I should have just written a book about the fact that both sides need a deal on health reform (was true in September 2011 and still true today). That was a mistake.

On the caddy tax v tax exclusion, this excerpt (p. 38-39) is illustrative. The cadillac tax is at once a tremendous policy victory for the generally conservative cause of worrying about costs, while also being a purposefully opaque means of achieving said goal.

The tax on high cost health insurance noted above is one of the most consequential
changes in the ACA because it represents a de facto capping of the subsidy
provided in the tax code to employer provided health insurance. This represents
a profound change of the health insurance landscape of the past 60 years, and
the President and the Democratic Congress have gotten too little credit in taking
this step.

As described earlier, this tax expenditure is one of the largest in our tax code and
amounts to a subsidy of around $250 billion last year that fl owed to persons with
employer provided health insurance, with high wage workers tending to receive the
largest subsidy since those with higher wages tend to have more generous bene fi ts.
The imposition of the excise tax of 40% on the amount above target cap levels
would create an incentive for insurance companies and employers to arrange for less
generous benefis for their employees.
Altering the tax treatment of employer paid insurance is an obvious “next step”
among policy wonks that would be taken to address health care costs. Indeed, this is
another example of an idea that is typically associated with Republican health plans
actually making it into the ACA. For example, then-Senator McCain’s health plan
in the 2008 Presidential campaign had at its center removing the tax preference of
employer provided health insurance. Candidate Obama criticized this approach during
the campaign, but the ACA contains a tax on high cost health insurance that will
achieve at least a capping of this subsidy.
The tax on high cost insurance works in a roundabout way to achieve this goal.
The rhetoric used in arguing for the tax focused on taxing insurance companies.
However, such a tax will certainly be passed on to employers and therefore employees,
since benefit costs are simply a portion of total compensation. This tax is one
that is designed to be avoided, meaning the successful functioning of the tax will be
shown through the reduction in generosity of benefit packages such that new total
premium amounts will be below the level at which the tax applies. For employees,
it is designed to trigger a conversation between employer and employee in which
health insurance bene fi ts are explicitly discussed as a portion of total employment
costs. Employees who now receive benefits and who may not even know their value
will be incentivized to know in the future. This will shift some compensation from
tax free (employer paid premiums) to taxable wages, increasing tax receipts.
Reforming the tax treatment of employer paid insurance will put downward pressure
on cost in fl ation in the private insurance market. It is important to address costs
in both private insurance and Medicare since payment differentials that are too large
will likely proved to be very dislocating to the ability of Medicare beneficiaries to
access health care services. We must address cost in fl ation in the private insurance
market as well as in Medicare, and the tax on high cost health insurance is a start to
doing so.

I would prefer a direct capping of the tax exclusion to the cadillac tax (I have written this many times, in many places). However, I would think that detractors would have a bit more humility about how hard it is to do hard things, especially as they are rising in their power. Another way to put it is this: since Republicans control the House and the Senate starting in January, 2015, they are free to go to the Commerce Committee in the House, and the Finance Committee in the Senate and replace the Cadillac tax with a capping of the exclusion. Show us how easy it is to do this very hard thing. If they try, I will help to make the case for it. Of course that would demonstrate they are interested in health reform, and not simply being unified by what they are against. I have my doubts.

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

One Response to Caddy Tax v Cap of Tax Exclusion in My Mostly Unread Book

  1. Bob Hertz says:

    The Cadillac tax has puzzled and frightened me, alternately.

    Part of the theory behind it is this: American health care costs are so high because insurers passively pay the padded bills.

    With skimpier plans, then, employees will face real costs, and their inevitable resistance will bring down the overcharges and price gouging.

    I may have commented to you before why I do not like this argument. It makes the employee into the kamikaze of cost control.

    Canada, France, Germany, and Japan, among other nations, have very rich benefit designs.
    They control costs by controlling them, bureaucratically. They do not wait for employees to deny themselves needed care, or for employees to face an unconscionable bill and get bitter about it.

    However, as Uwe Reinhardt has pointed out, the American Congress shows no ability to control costs for those under age 65.

    In my own experience in the benefit world, those health plans with high premiums usually just have a lot of 55 year olds and very few younger employees. Taxing these plans will harm the 55 year olds, and most employers are too pressed to just give salary increases in place of health benefits.

    I am skeptical that a Cadillac tax would accomplish anything positive.

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