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House Shouldn’t Repeal or Further Delay “Cadillac Tax”

The House Ways and Means Committee will mark up a bill today to delay the excise tax on high-cost health plans (the so-called “Cadillac tax”) by another year, to 2023.  That would be unwise for two reasons: it would lose needed revenue, and it would set back efforts to slow the growth of health care costs.

The Affordable Care Act (ACA) imposed a 40 percent excise tax on the value of employer-sponsored health plans that exceeds certain high thresholds (about $11,000 for individuals and $30,000 for families in 2022).  It was originally scheduled to take effect in 2018, but lawmakers have twice delayed it.  Delaying it again, from 2022 (its current start date) to 2023, would cost $13.6 billion, the Joint Committee on Taxation estimates.

The excise tax has a strong policy rationale.  Health policy experts of all political persuasions have long viewed the unlimited exclusion of employer-financed health insurance from income and payroll taxes as economically inefficient and regressive.  The tax limits the exclusion.

Initially, the tax won’t affect most workers and health plans, since its thresholds substantially exceed the value of the typical plan.  Had it taken effect in 2020, only 7 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, and the tax would have applied to only 1 percent of plan costs.  The comparable figures for 2022 would be only slightly larger.

In addition to raising needed revenue, the tax will help slow health care cost growth.  In fact, it’s one of the ACA’s most important cost-containment measures.  It will discourage firms from buying extremely generous health coverage that promotes the excess use of health care.  And it will “encourage the dissemination of less costly ways to deliver appropriate medical services,” the Congressional Budget Office has concluded.

Instead of further delaying or repealing the tax, policymakers should either adjust it to address certain concerns that have been raised (as the Obama Administration proposed) or replace it with a similar measure to help contain health care costs, such as a well-designed cap on the tax exclusion for employer-based health coverage (as several Republican analysts have suggested).