Washington Post Defends the Cadillac Tax

The Washington Post published an editorial Sunday defending the “Cadillac tax,” a part of the Affordable Care Act, in the face of a legislative effort to repeal it before it can even take effect.

The provision is an excise tax of 40 percent levied on employer-provided health-care plans with values over a certain threshold, which are all currently tax-exempt. The tax will affect individual plans exceeding $10,200 in value and family plans exceeding $27,500, with the thresholds indexed to inflation. If health-care costs continue to rise faster than inflation, the tax will be more noticeable over time. We’ve written previously about how the tax is an important tool to slow health care spending growth.

The editorial cites a report by the non-partisan Kaiser Family Foundation finding that a quarter of employers offer at least one plan that would be affected if no changes are made to their offerings. It is no surprise, then, that “unions, insurers, chambers of commerce and other interests will resist reduction in the subsidies they benefit from,” the paper comments.

As the editorial explains, the current tax subsidy for employer-sponsored health-care premiums causes employers to overspend on health-care at the expense of other forms of compensation:

The federal government has allowed companies for decades to offer employees tax-free compensation in the form of health-care benefits. This costs the government huge amounts of money in foregone tax revenue. Moreover, if you subsidize something, such as health-care spending, you get more of it, regardless of whether it’s the most rational form of compensation. Government policy, then, actively encourages overspending on health care and underspending on, say, wages.

The editorial also explains how the Cadillac tax limits the subsidy:

…Congress effectively set a limit on the size of the tax subsidy it’s willing to offer employer health-care plans and indexed it to inflation. Generous plans that exceed that limit will be taxed at higher rates. If health-care costs increase more quickly than inflation, more plans may be hit with the Cadillac tax later on. This imposes some much-needed discipline on employer-sponsored health plans, discouraging rapid increases in health-care costs.

The Congressional Budget Office and Joint Committee on Taxation estimate that the tax will raise $87 billion over the next ten years. Repealing the Cadillac tax would make the budget situation worse, likely increase national health spending, and decrease wages. If Congress wants to eliminate the Cadillac tax, they should replace it with other savings that will reduce health care cost growth.