What Can We Expect from the "Cadillac Tax" in 2018 and Beyond?

By Herring, Bradley; Lentz, Lisa Korin | Inquiry, Winter 2011 | Go to article overview

What Can We Expect from the "Cadillac Tax" in 2018 and Beyond?


Herring, Bradley, Lentz, Lisa Korin, Inquiry


One controversial aspect of the Patient Protection and Affordable Care Act is the provision to impose a 40% excise tax on insurance benefits above a certain threshold, commonly referred to as the "Cadillac tax." We use the Employer Health Benefits Survey, sponsored by the Kaiser Family Foundation and Health Research and Educational Trust, to examine the number and characteristics of plans that likely will be affected. We estimate that about 16% of plans will incur the tax upon implementation in 2018, while about 75% of plans will incur the tax a decade later due to the indexing of the tax thresholds with the Consumer Price Index. If the Cadillac tax is ultimately implemented as written, we find that it will likely reduce private health care benefits by. 7% in 2018 and 3.1% in 2029, and will likely raise about $931 billion in revenue over the ensuing 10-year budget window from 2020 to 2029.

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One of the more controversial provisions within the 2010 Patient Protection and Affordable Care Act (ACA) is the excise tax on high-cost private health insurance plans, commonly referred to as the "Cadillac tax." Starting on Jan. 1, 2018, a 40% excise tax will be imposed on employment-based health insurance plans whose value exceeds $10,200 for single coverage and $27,500 for family coverage; both premiums and amounts deposited into tax-preferred accounts will count towards the value of the benefits. The tax will equal 40% of the difference between the value of the benefits and these threshold levels, though the thresholds will be increased for certain groups. While the excise tax payments are expected to come to the U.S. Treasury directly from private health insurers and self-insured employers, the private health plans are almost certain to indirectly pass along the costs of paying the excise tax to employers as relatively higher premiums.

During the health care reform debate, the Cadillac tax was heavily opposed by many progressives and by labor union members who historically had negotiated for more generous benefits in lieu of higher wages. (Many Republicans also appeared to oppose the Cadillac tax, but it is difficult to isolate their opposition to the tax from the overall bill.) The excise tax was in the initial Senate version of the legislation but was not included in the initial House of Representatives version of the legislation. The amendment to reconcile the Senate and House versions of the legislation postponed the implementation of the Senate's excise tax proposal from 2013 to 2018. The White House reportedly advocated for keeping the Cadillac tax, primarily because of its desire that the health care legislation, over the long term, be scored to slow the growth in health care spending and reduce the federal budget deficit (Montgomery and Shear 2010).

As with other excise taxes, a main objective of the Cadillac tax, besides simply raising revenue, is to change consumer behavior. Just as cigarette taxes aim to discourage people from smoking, the Cadillac tax aims to discourage people from obtaining overly generous, "luxurious," or "gold-plated" health insurance coverage. Health economists have long argued that the tax subsidy for employment-based insurance is both inefficient and inequitable (Pauly 1986). Because employment-based health insurance premiums are not subject to income and payroll taxes, workers have an incentive to shift their compensation from taxable wages to tax-exempt benefits. The more generous health benefits that result then have the potential to increase the utilization of low-value medical care by further insulating patients from the true costs of that care (although research to date has not consistently shown that higher cost-sharing reduces the use of low-value care more than high-value care, where "value" here denotes the underlying cost effectiveness of the health care service). The inequity of the current tax subsidy results from higher-income people receiving a larger subsidy towards their health insurance premiums because of their higher marginal tax rates. …

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