Congress Shouldn’t Suspend Health-Related Taxes

The four-week federal funding bill that the House will consider tomorrow would temporarily suspend or delay three health-related taxes: the 2.3 percent excise tax on medical devices, the fee on health insurance providers (also known as the health insurance tax), and the excise tax on high-cost health insurance plans (the “Cadillac tax”). These taxes represent sound public policy, and suspending them would be unwise. Delaying the Cadillac tax would be especially unfortunate, since it would set back efforts to reduce cost growth and improve the efficiency of health care.

The first problem with the proposed tax delays is their resulting revenue loss, which the House bill does not offset. Even if the tax changes are indeed only temporary, they would cost roughly $33 billion over the next few years. Since all three taxes have already been suspended or delayed once, however, doing so again could lead toward permanent repeal, which would add close to $300 billion to the debt over ten years.

More unpaid-for tax cuts now will increase pressure for program cuts later. When the tax cuts cause deficits to rise, Republicans will use those higher deficits to justify the kinds of deep program cuts that they’ve already proposed in their long-range budget plans.

Medical device tax. The medical device industry has heavily lobbied Congress to repeal the device tax, but its arguments don’t withstand scrutiny. The tax will have a minimal effect on consumers; it doesn’t apply to eyeglasses, contact lenses, hearing aids, wheelchairs, or any other devices that the public generally buys at retail for individual use. The tax doesn’t cause manufacturers to shift production overseas, since it applies equally to imported and domestically produced devices. While the tax was in effect from 2013 through 2015, it had little or no discernable effect on employment or innovation in the device industry.

Health insurance tax. Health insurers argue that suspending or repealing the health insurance tax would make coverage more affordable, but other policies would be more effective in limiting premiums in the individual insurance market — the main focus of recent public debate. At best, suspending the tax would reduce individual market premiums by less than 3 percent, according to industry-sponsored estimates.

And suspending the tax in 2019, as the House bill proposes, could have even less effect on premiums that year. Because insurers’ tax liability in 2019 will depend on their volume of business in 2018, they may have little incentive to pass the savings from a 2019 moratorium through to consumers in the form of lower premiums. Other policies, such as a permanent reinsurance program or increases in federal premium tax credits that help low- and moderate-income people buy health insurance, would do much more to make individual market coverage more affordable at much lower cost.

Cadillac tax. The Cadillac tax is designed to slow health care cost growth by discouraging firms from buying extremely expensive health coverage that promotes excess use and inefficient delivery of health care. It’s a 40 percent excise tax on the value of employer-sponsored health plans that exceeds certain high levels of cost starting in 2020. Although the tax would initially apply to only a small share of premium dollars, it would significantly reduce national health expenditures in the long run and raise wages, the Congressional Budget Office projects. The tax was originally scheduled to take effect in 2018, but the December 2015 bipartisan tax deal delayed it by two years, and the House bill would delay it for two more.

Instead of delaying or repealing the Cadillac tax, policymakers should either make adjustments to address various concerns that have been raised (as the Obama Administration proposed) or replace the tax with a similar measure to achieve cost-containment goals, such as a well-designed cap on the tax exclusion for employer-based health coverage (as several Republican analysts have suggested).