Permanent repeal of three health-related taxes, which last year’s budget deal postponed or suspended, would cost the federal government more than $250 billion over the next decade, new Congressional Budget Office (CBO) estimates show — and almost certainly much more in decades to follow.
The three health-related taxes are the excise tax on high-cost health plans (the so-called “Cadillac” tax), the medical device tax, and the tax on health insurers. With these taxes now postponed or suspended, policymakers could well start to treat them like other temporary tax provisions that they routinely extend — effectively making the delays permanent.
More specifically, CBO estimates that permanently cancelling these provisions would reduce revenues by $256 billion over the next decade. Extrapolating beyond that first decade, we estimate that the revenue loss would swell to roughly $850 billion in the second decade, largely due to the Cadillac tax. Over the next two decades combined, repealing the three taxes would add $1.4 trillion to the debt, including associated debt service costs. As a result, the ratio of federal debt to gross domestic product (i.e., the debt-to-GDP ratio) would be roughly 1.0 percentage point higher in 2026 and 3.4 percentage points higher in 2036 (see chart).
There’s a particularly strong policy rationale for retaining the excise tax on high-cost plans (while modifying it to address various concerns), as it raises the most revenue of the three taxes in the long run and has the potential to help slow the rate of growth of health care costs.
The tax preserves but limits the tax exclusion for employer-sponsored health insurance. Initially, the excise tax won’t affect most workers and health plans, since its thresholds for imposing the tax substantially exceed the value of the typical plan. Had the tax taken effect in 2018, as health reform envisioned, only 4 percent of people with employer-sponsored coverage would have been enrolled in plans whose projected costs exceeded the tax’s threshold for that year, a Treasury Department analysis found. Moreover, even this figure tends to overstate the tax’s effects, since the tax applies only to the portion of plan costs that exceeds the threshold. The tax would have applied to only 1 percent of plan costs in 2018, Treasury found. The comparable figures for 2020 — the tax’s new start date — would be only slightly larger.
As noted, in addition to raising needed revenue, the tax will help slow health care costs. In fact, the excise tax is one of health reform’s most important cost-containment measures. It will discourage firms from buying extremely generous health coverage that promotes excess health care use. It will “encourage the dissemination of less costly ways to deliver appropriate medical services,” CBO has concluded.
To be sure, the tax has some flaws, and some changes in it deserve consideration. For example, as the tax now stands, its thresholds will rise with the Consumer Price Index (CPI). Since the CPI rises more slowly than health care costs do, the tax will eventually affect too large a share of health plans. The tax can (and should) be modified to address such concerns.
The tax’s basic concept is sound, however. Thus, policymakers should explore reforms in the tax (or an alternative health-related tax mechanism) that retain the tax’s revenues and help to slow the growth of health care costs.