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The House voted to repeal the Cadillac tax on Wednesday, aiming to make permanent what previous Congresses have merely postponed. The tax was a provision of the Affordable Care Act intended to lower health spending and reduce the federal deficit. But Congress has never allowed the tax to go into effect.
Why is it called the Cadillac tax?
It is a weird and anachronistic name, evoking a time when the Cadillac was the paradigmatic luxury vehicle. The idea is that the tax would apply only to the most deluxe health plans.
It would, sort of. The tax is devised to apply to health plans that are expensive. That means it would tend to affect the most generous plans, those offering workers the broadest set of benefits, the widest choice of doctors, and the lowest deductibles. But it would also tend to hit some plans that are more typical in their design, but happen to cover a work force that is older and sicker. In practice, the Cadillac tax may affect both the Cadillac owner and the worker who assembles the cars.
Is my plan a Cadillac plan?
Around 21 percent of employers offer health plans today that would be eligible for the tax if it went into effect, according to the Kaiser Family Foundation. The plans that qualify tend to be generous plans, like those offered by companies in very competitive, high-paying industries, or those with unionized work forces. If you use your health plan a lot and have few complaints about it, you might have a Cadillac plan.
To be more precise, if your insurance costs more than $11,000 for an individual plan or $30,000 for a family plan, it might be hit by the tax when it is scheduled to begin in 2022.
Who likes it?
Economists love the Cadillac tax. When Congress considered an earlier postponement of the tax, around 100 of them signed a letter to complain.
The argument for the tax is that our current system, which taxes wages but not health benefits, is distorting. The Cadillac tax, which taxes only the most expensive health plans, makes those bonus benefits more like extra salary. Some employers might still offer them — or they might look to spend less on health care to avoid the tax.
“You can’t get economists to agree about anything — anything!” said Jonathan Gruber, an M.I.T. economist who advised the Obama administration as it was developing the Affordable Care Act. “It raises money, it’s progressive, and it’s efficient. You can’t find a lot of things like that.”
Some deficit hawks also like the Cadillac tax, since, in addition to pushing down the price of health insurance, it was also devised to raise money to pay for other policy priorities.
Who dislikes it?
A lot of people who are not economists. If it ever went into effect, the tax would either increase businesses’ tax burden or encourage them to offer their workers skimpier insurance. Neither outcome is much of a crowd pleaser.
It was Democrats who passed the Affordable Care Act, but in the years since many of the party’s leaders have denounced the Cadillac provision. In their 2016 presidential campaigns, both Hillary Clinton and Bernie Sanders said they wanted to repeal it. Republicans have a more mixed record on the tax. They tend to be more likely to favor proposals that would tax health benefits like income, but many don’t like the particular design of this tax — or the fact that it was part of Obamacare.
“It’s not popular in any way at all, and it’s not showed any signs of becoming any more popular,” said David Cutler, a Harvard economist who helped advise the Obama administration on health policy. “It’s very hard to find anyone who really wants it.”
Unions, in particular, have long loathed the Cadillac tax. Many of them have negotiated hard to preserve generous health benefits for their workers, often at the expense of salary increases.
If it’s so unpopular, how did it ever get passed?
The Cadillac tax is a good example of a public policy that probably never would have passed on its own. But it did not pass alone — it passed as part of a large package of health overhauls in the Affordable Care Act.
The Democratic leadership in Congress and the Obama White House wanted to be sure that the health bill would not increase the federal deficit, even though they also wanted it to expand government-subsidized health coverage to millions of low-income, uninsured Americans. That meant that the law’s writers were looking for ways to trim money out of the existing system in order to pay for the new programs.
The Cadillac tax was appealing because it was estimated to reduce health spending and raise revenue — and the economists close to Democratic politicians liked it. President Obama was also interested in ideas that would reduce the growth in health care spending, and he was persuaded that this policy could help do that.
The pitch that officials made to reluctant lawmakers was that this policy would help pay for policies they loved more.
Is it definitely going to be repealed?
No. The House vote is just one step. The Senate would have to pass similar legislation, and the president would have to sign it. The Republican Senate has voted for previous bills that would delay enactment of the tax, so there may be interest in its permanent repeal. But the Cadillac tax has not been a particular policy priority of Senate leadership, and the Senate Finance Committee has not yet considered a bill to repeal it.
What will it mean if it’s repealed?
In practice, not much. Though the tax has been on the books since Obamacare passed in 2010, its enactment has been continuously postponed. Some businesses have already made changes to their plans in anticipation of its enactment, but they are unlikely to return to richer health plans even if it goes away.
On paper, repealing the tax means the federal deficit would be estimated to grow in coming years. A recent estimate from the Congressional Budget Office said that repealing the tax would raise the deficit by $193 billion between 2022 and 2029. That’s more than the federal cost of the entire Children’s Health Insurance Program over a decade.
