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

Congress is facing renewed calls to repeal or further delay the “Cadillac tax” — the excise tax on high-cost health plans. That would be unwise for two reasons: it would lose needed revenue and 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 its current start date of 2022 to 2023 (as House Republicans have proposed), would cost $13.6 billion, the Joint Committee on Taxation estimates. Repealing it would cost $168 billion through 2028.

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 with projected costs that 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 repealing or further delaying the tax, policymakers should 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 a bipartisan group of scholars from the American Enterprise Institute and the Brookings Institution recently wrote, “We urge Congress either to allow the Cadillac tax to take effect or to legislate a cap on the tax exclusion, so that premiums above the cap would be treated as income to covered workers. . . . Further delays, or repealing the tax outright without a substitute that limits the tax exclusion, would leave in place the current incentives that increase spending rather than value in health care.”