Oxford University Press's
Academic Insights for the Thinking World

Deferring the Cadillac tax kills it

Sometimes it is gratifying to have predicted the future. Sometimes it is not. The recent postponement of the so-called “Cadillac tax” until 2020 falls into the latter category. I predicted this kind of outcome when the Cadillac tax was first enacted as part of the Affordable Care Act, popularly known as “Obamacare.” I am unhappy that events have now proven this prediction correct. As a political matter, the deferral of the Cadillac tax effectively kills it.

Many serious commentators on the American healthcare system criticize the Internal Revenue Code’s treatment of employer-provided medical care premiums. Employer-paid premiums are excluded from employees’ gross incomes for tax purposes. This exclusion results in higher medical costs since employees are sheltered from the consequences of their employers’ greater health care outlays. Employees thus lack the incentive to help their employers control medical costs.

If employer-provided health care premiums were instead included in employees’ gross incomes, employees and employers would be forced to make hard decisions to control those premiums. By sparing employees the pain of reporting as income the medical insurance costs their employers pay for them, the Internal Revenue Code hampers the unpleasant but necessary task of confronting these costs.

The Cadillac tax is a modest effort to control healthcare outlays by penalizing expensive “Cadillac” health plans. Embodied in the now-postponed Section 4980I of the Internal Revenue Code, the Cadillac tax would tax employer-provided medical coverage costing annually more than $10,200 for an individual or more than $27,500 for a family. The tax of Section 4980I would be 40% of the excess over these thresholds. Thus, for example, if an employer-sponsored health plan pays $11,000 annually for individual coverage, a tax of $320 would be due, i.e., ($11,000 – $10,200) x 40%. The drafters of Section 4980I intended that the prospect of this Cadillac tax would encourage employers and employees to control medical costs to avoid this penalty tax.

The Cadillac tax is a decidedly modest reform compared to the real solution for the underlying problem—namely, making all health insurance premiums taxable income to the employees covered by such premiums. Nevertheless, the tax was an initial step in the right direction. The Cadillac tax would have begun the process of curbing the Internal Revenue Code’s subsidy of high medical insurance costs.

In the Consolidated Appropriations Act 2016, Congress and President Obama have now attenuated even this modest measure. They agreed that the Cadillac tax, previously scheduled to take effect on 1 January 2018, will now be delayed until 1 January 2020. As a political matter, this delay effectively kills the Cadillac tax.

Right after the adoption of the Cadillac tax, I predicted that Congress would not allow this levy to go into effect. The Obamacare statute, passed in 2010, originally scheduled the Cadillac tax to take effect eight years later in 2018. Thus, from the beginning, the tax was perceived to be politically toxic. Hence, the Congress and President Obama initially delayed the tax’s effective date into the future.

At the time, I predicted that, as we got closer to 2018, the political calculus would remain the same and that future Congresses and Presidents would be unwilling to actually impose the Cadillac tax—just as President Obama and the Congress that passed the Affordable Care Act were unwilling to implement the tax in a timely manner.

Events have now, unfortunately, proven this prediction to be correct. Republicans and Democrats alike were unwilling to enter the 2016 campaign season with the enforcement of the Cadillac tax on the political horizon. Republicans oppose the Cadillac tax because it is a tax. Democrats oppose the Cadillac tax because many of the most expensive healthcare plans are union-negotiated arrangements.

Some advocates of this recent delay argue that, before 2020, the Cadillac tax will be replaced by something better. I am skeptical. If Congress had been willing to adopt an alternative to Code Section 4980I, it could have done so now. Delaying the Cadillac tax to 2020 instead sets the tax on course for repeal.

Healthcare costs cannot be controlled until they are confronted. The Cadillac tax was a modest step in that direction. The delay of the Cadillac tax reflects an unfortunate reality: On a bipartisan basis, our elected officials denounce high healthcare costs but are in practice unwilling to take the painful steps necessary to actually control such costs.

Image Credit: “Leader Pelosi” by Nancy Pelosi. CC BY 2.0 via Flickr.

Recent Comments

  1. Jay

    If our health care costs truly ARE out of control (and I would argue that despite the statistics thrown around that it is not all that clear) the best, and perhaps ONLY way to address that is to get back to a system that was in place for decades – only have insurance for true insurance needs. When patients had more responsibility for the direct costs of the treatment, costs were more in line with other costs in the economy. As more costs were covered by third parties (and this is true when the government is the third party too) there is no incentive for the user to ask or know what the actual costs are.

    Two areas where we KNOW consumer directed payment works to make things more efficient are in LASIK and plastic surgery. Neither is covered by insurance (typically) yet both are getting better outcomes at lower costs for consumers over time. They are no less complicated than other medical procedures but when patients foot the bill, they demand more info.

    Those are not perfect examples because they are usually elective and many procedures would not be but they demonstrate the power of actual consumers when they are making the decisions.

Leave a Comment

Your email address will not be published. Required fields are marked *