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The Excise Tax on High-Cost Health Plans Should Stay

September 29, 2015 at 12:15 PM

Update, September 30:  we’ve updated this post to reflect a new estimate of the cost of repealing the excise tax.

The House will soon consider budget reconciliation legislation that includes a provision, approved by the Ways and Means Committee, to repeal health reform’s excise tax on high-cost health plans (the so-called “Cadillac tax”).  But the tax has a strong policy rationale, and repealing it would be unwise.

Health reform imposes an excise tax of 40 percent on the value of employer-sponsored health plans that exceeds $10,200 for individuals and $27,500 for families, starting in 2018.  (Higher dollar limits apply in certain cases.)  The thresholds will rise in tandem with the consumer price index (CPI) plus one percentage point in 2019 and with the CPI thereafter. 

Some changes to the tax deserve consideration.  For example, unless the thresholds rise more rapidly than the CPI, the tax will eventually affect too large a share of health plans.  But the tax’s basic concept is sound, and immediate changes aren’t required.  Here are four reasons why:

  1. It preserves but limits the tax exclusion for employer-sponsored insurance.  The excise tax initially won’t affect most workers and health plans, since its thresholds well exceed the value of the typical plan.  Moreover, since it applies only to costs above the dollar thresholds, it will have a minimal effect on people with plans just over the thresholds.  The tax will affect just 10 percent of premiums for individual plans and 6 percent of premiums for family plans in 2018, according to the Congressional Research Service.
  2. It will help slow health care costs.  The 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.  The Congressional Budget Office (CBO) says it will “encourage the dissemination of less costly ways to deliver appropriate medical services.”
  3. It helps pay for expanding health coverage to 24 million more Americans.  Repealing the tax would raise deficits by $91 billion over the next ten years, the Joint Committee on Taxation estimates.
  4. It will lead to higher pay for workers.  Experts expect that most affected employers will scale back their health plans to stay below the thresholds and avoid paying the tax.  Slower growth in health spending will mean larger increases in workers’ take-home pay, as employers generally convert their spending for health coverage into higher wages and salaries.  Indeed, three-quarters of the revenue from the tax will come from income and payroll taxes on workers’ higher pay, according to CBO and the Joint Committee on Taxation.
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