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Improve, Don’t Repeal, ObamaCare’s Cadillac Tax

Brian Blase, PhD

There’s one provision of ObamaCare almost everyone wants to repeal. Last week the House voted 419-6 to repeal the so-called Cadillac tax, a 40% excise on high-cost employer-sponsored health insurance. The bill now moves to the Senate.

Congress has twice delayed the tax—originally set to take effect in 2018—and weakened it by allowing employers to deduct the levy itself from their profits. But repealing the Cadillac tax is a bad idea. Instead, Congress should modify it to encourage the use of health savings accounts.

The Cadillac tax was one of roughly 20 new or expanded taxes contained in the 2010 health law. Along with provisions to reduce Medicare spending, the taxes were meant to pay for ObamaCare’s expensive subsidies and Medicaid expansion. The Congressional Budget Office estimates the Cadillac tax would apply to health-insurance plans with premiums of more than $11,200 for individuals and $30,100 for families in 2022, when it is now scheduled to take effect. The Joint Committee on Taxation projects the tax to generate $197 billion in total revenue from 2022-29. But the true policy goal of the Cadillac tax is to address the tax code’s preference for lavish plans, since premiums—both the employer and worker share—aren’t subject to federal income or payroll taxes.

The Cadillac tax has consistently been one of ObamaCare’s most reviled taxes, scorned by business and labor interests as well as hospitals and private insurers. The main constituencies of the Cadillac tax are health-care economists and deficit hawks—a weak political coalition.

An uncapped tax benefit for health-insurance premiums is costly. It drags down wages and pushes up health-care spending by contributing to the third-party-payment problem. Ninety percent of health-care payments run through government bureaucracies or insurance companies. Consumers tend not to care how much things cost when someone else is paying for them. And so it is with health care: Providers cater to the interests of payers—in this case the insurer, employer or government bureaucracy—not consumers.

During the effort to repeal and replace ObamaCare in 2017, Republicans attempted to replace the Cadillac tax with a cap on the amount of tax-free coverage the law allowed. This would have reduced the problems with the current tax treatment of employer-sponsored coverage and would have been fairer than the Cadillac tax. Low-income workers suffer more from a 40% excise tax than do upper-income workers in higher tax brackets.

Health savings accounts can be a bulwark against the third-party-payment problem. They encourage consumers to shop around and assess what’s worth the cost. Research shows HSAs reduce unnecessary services and tests. A better policy would shift the tax advantage toward HSAs and away from third-party payment—especially high-cost employer-sponsored insurance. This would give employees greater control over their health spending and reduce the incentive to overconsume care.

Instead of repealing the Cadillac tax, Congress should exempt both employer and employee HSA contributions from the calculation of the value of the plan for the purpose of enforcing the Cadillac tax. Exempting these contributions would give employers an incentive to offer their employees HSA-qualified plans and fund their accounts. This would erode the third-party-payment problem and nudge more Americans to consume health care the way they consume other services. We’ll know we’re on the right track when more health-care providers begin to compete directly for consumers’ business, and those consumers feel empowered to make decisions on price. It would be far better for Congress to relax the Cadillac tax threshold to encourage HSAs than to kill ObamaCare’s main provision for lowering health-care cost inflation.

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