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Don't Get Rid of the Cadillac Tax!

In defense of an Obamacare tax.

There is precious little to like about either Obamacare or taxes, and you will rarely see praise in this space for either, let alone both at the same time. This is one such rare instance.

The tax in question is Obamacare's "Cadillac tax," which applies to very generous health-insurance policies provided by employers. It is scheduled to take effect in 2018. At present members of both parties are either railing against it or expressing deep skepticism, and a move is afoot to repeal it before it ever takes effect. This is a bad idea.

To understand why, you need to understand the original sin of the American health-care marketplace. It was committed back in World War 2, when inflation led workers to demand higher wages - which many employers could not afford to pay because of price controls. (Those had been imposed so the government could continue the war effort at lower cost.) The result was a federally imposed wage freeze.

With wages frozen, employers needed another way to compete for labor made scarce by the draft. So some began offering health coverage. The practice took root, spread, and outlasted the war. In 1949 the National Labor Relations Board ruled that health benefits counted as wages for the purpose of union negotiations. Five years later, the IRS ruled that health coverage was not taxable income. The result was a double incentive for employers to offer fatter health benefits in lieu of fatter paychecks.

Because someone else was giving them ever-more-generous health coverage, recipients had ever less reason to control costs or guard against waste. The result: a skyrocketing, ultimately unsustainable increase in national outlays for health care. (Other factors contributed to that increase as well, but perhaps none more than those explained above.)

In short, for decades the federal government has encouraged employers to provide gold-plated health-care plans. The Cadillac tax seeks to correct this, at least slightly, by taxing employer health benefits above a certain point: $10,200 for individuals and $27,500 for families starting in 2018. If, say, your employer provides your family with a health plan worth $29,500, then the amount above the cap ($2,000) would be taxed at 40 percent, meaning your employer would be on the hook for $800 in taxes.

Employers don't care for this, for obvious reasons. And those employers who offer flexible spending accounts and health savings accounts abhor it. That is because FSAs and HSAs allow employees to set aside funds (up to $2,550 at present) for medical care not covered by insurance. The employees get a tax break on their FSAs and HSAs. But the money set aside gets counted toward the Cadillac-tax insurance cap. This means a company could ratchet down its health-coverage plans to avoid the Cadillac tax, only to have to pay the tax anyway for each employee whose savings push the total benefit package back over the cap. Some health-care analysts expect the Cadillac tax will therefore kill off FSAs and HSAs entirely. (There are ways to avoid this dilemma, although none is terribly appealing.)

Is any of this ideal? Absolutely not. Nobody designing the American health care system from the ground up would organize it this way. The system is by now little more than a collection of kludges: clumsy, inefficient patches that make something more complicated in order to fix this or that aspect of it. The Cadillac tax amounts to yet another clumsy patch.

A scorched-earth reform of the health-care system would reach back several decades to correct its original sin. Eliminate the tax preference for employer-provided health care entirely and let people buy health insurance on their own, just as they buy most other kinds of insurance. To help the poor afford coverage, we could offer a refundable tax credit - i.e., one available even to those who pay no income taxes. This would produce a back-door version of universal coverage, with far less bureaucracy and government intrusion. It also would eliminate the current problem of providing vastly different incentives to health-insurance consumers depending on where they get their coverage.

That might be the best solution, but at present it's about as likely as Miley Cyrus becoming a nun. Politics is the art of the possible, and for now the Cadillac tax is not only possible, it's the law. It would be a grievous mistake indeed if Congress were to repeal one of the few parts of Obamacare that might actually work.

This article originally appeared at the Richmond Times-Dispatch.

Photo Credit: Wikipedia

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  • woody the woodchipper||

    fuck off slaver?

  • rudehost||

    Reason sounds "progressively" more like the bastard love child of the Huffington Post and the National Review.

  • Unicorn Abattoir||

    HuffPost says she had been drinking, but National Review claimed that she initiated the encounter. Robby Soave article to follow...

  • jrom||

    We get stuck with expensive Obamacare. If we try to go without health insurance, the federal asshole prosecutor will send us to prison for at least ten years. The government crooks get free healthcare, including dental and vision for life. And many government employees get a six figure pension besides. Now the unions, including government employee and teachers unions are pissed at a tax on their big bloated benefit packages. And it does not even go into effect for another five years. By that time the new Deomocrook president and new Democrook congress will have already given them a exemption. Just like congress and all government employees are already exempt.

  • Ken in NH||

    Once more, with feeling!

  • jrom||

    I do get passionate and angry about our corrupt and incompetent government!

  • PlaystoomuchHALO||

    More likely is a final push to nationalize health care under a single-payer system so we can hurry up an die sooner.

  • blondrealist||

    The best article I've seen in a while on our screwed up health insurance system. I've said many times that the post WW2 wage/price freeze followed by tax code quirk for employer-proved health insurance is the biggest reason our health insurance system and health care is so expensive and shielded from market forces in too many ways.

    The scorched earth approach sounds good to me, but wonder if it would require an individual mandate (like Switzerland).

    In the mean time, let's go beyond the Cadillac health plan tax -- let's consider all employer-provided health insurance currently being paid by the employer as taxable income. After all, it's part of an employee's compensation, just like wages -- and it's deductible by the employer -- just like wages.

  • AlgerHiss||

    Exactly: This is one out of a thousand pieces written that accurately describes the origin of how health insurance got so bastardized and removed from anything close to a free market.

  • ace_m82||

    The scorched earth approach sounds good to me, but wonder if it would require an individual mandate (like Switzerland).

    No, it would "require" nothing at all. Just leave people alone to purchase insurance if they want it. Shockingly enough, price would go down as the artificial demand is eliminated.

  • ace_m82||

    I hate squirrels... This post was a response to blondrealist.

  • NotAnotherSkippy||

    Medicare had a bigger impact on spending and costs than the employer exemption, not that I care for the latter either.

  • Jima||

    So, after recognizing that this is yet one more Band-Aid on a terminal patient, you advocate for another Band-Aid? Which incidentally adds to the sums available for waste by our government? This seems like a piss poor solution. Your article does a great job of laying out a potential reason why the problem exists, and seems on point. I admit to having no solution to offer other than scrapping the whole system, but doesn't it seem like that might be the right one? To mix metaphors, at some point there's so much duct tape on the cracked window that no one can see out anymore. We need to elect some folks with enough balls to get something done in DC. Does every problem have to devolve into a total catastrophe before we can fix it? How about we make every Representative and Senator limited to one additional term after their initial selection? At least that way, half of them wouldn't have to worry about re-election. Maybe they could actually focus on getting something done.

  • Haskell_Hunter||

    What's the over/under on Miley Cyrus becoming a nun? I might drop a Benjamin on that.

  • bvandyke||

    depends on what she gets out of becoming a nun

  • Cloudbuster||

  • ||

    Madonna sure made out pretty well being a nun.

  • rudehost||

    A complete rework seems sensible but the proposed solution here is moronic. Basically today government provides incentives to get employers to provide coverage. The "Cadillac" tax takes it a bit further and tries to get them to provide a certain amount of coverage but no more. Lifting the tax actually reduces the amount of social engineering by keeping the incentive for minimum coverage but removing the disincentive for more coverage. That strikes me as less social engineering than what we have today and as I see it less social engineering and coercion is a good thing.

    Too bad reason seems to differ.

  • tlapp||

    The Cadillac tax will cause employers to offer more minimal coverage if they have in the past provided more generous plans. Interestingly the unions that supported Obamacare have often listed the improved healthcare as a benefit they negotiated. Now it will be diminished by the very law they supported. One less thing for unions to negotiate for their members, one less reason for their existence.

  • bvandyke||

    This sounds reasonable and be one of the many causes but I don't know if keep the tax is a good thing or not.

    I currently work for a company with a plan that is considered a Cadillac plan. Our HR as been pretty transparent (and hopefully honest) about the affects Obamacare will have on our company and insurance once all of it comes into play. It is not good, my currently increasing costs for insurance would skyrocket and it is very possible that the company would not be able to offer insurance at all. This might actually be the goal (I think it is).

    I can say this, my current benefits are not all that great - $5500 yearly deductible for family, co-pays, limited choice on providers, etc. I've had much better previously that cost me less.

    One of my understandings is that insurance (malpractice specifically) and our sue happy legal system is one of the big causes of the run-away costs. Also the added costs for all the bureaucracy that has been created over the last 20 years is a huge part.

    Instead of boosting up the insurance companies by making it law that you have to have insurance, we can do something about the run-away lawsuits and bureaucracy first. Could be that if you lower the burden cost to the doctors, providers, and hospitals, actual health care costs might come down.

  • Steve Bumgardner||

    Indiana, where I live., passed major malpractice reform. Unintended consequences are a bear.

    Today the lawyers will only take cases where they make out like bandits. Questionable cases do better than legit cases. Folks with honorable intentions can't get a lawyer to represent them.

    Watch out what you ask for. You might just get it.

  • Fairbanks||

    "Questionable cases do better than legit cases." Can you explain?

  • twoskinsoneman||

    Don't get rid of a tax?... trying to find something strong enough to be satisfying but won't get my info subpoenaed....I give up. You suck.

  • JWatts||

    "In short, for decades the federal government has encouraged employers to provide gold-plated health-care plans. The Cadillac tax seeks to correct this, at least slightly, by taxing employer health benefits above a certain point: $10,200 for individuals and $27,500 for families starting in 2018. If, say, your employer provides your family with a health plan worth $29,500, then the amount above the cap ($2,000) would be taxed at 40 percent, meaning your employer would be on the hook for $800 in taxes."

    No, Hinkle this is a dumb ass Proggie version of a cap. In a sane world, you would have just eliminated the tax deduction above a certain limit. So, it's just the same as normal income above that limit. But in Proggie land everyone has to be forced to do things the same way, ergo we have a 40% tax rate above the cap vs just defaulting to treating it as normal income.

  • Fairbanks||

    It's worse than that. This puts the tax on the employer, even though the employer is incurring a legitimate business expense. The tax should be on the employee, where it belongs, by including the "excess" coverage in income. Better would be to include the entire value of the insurance in income.

  • retiredfire||

    It's worse than that. As I understand it, the tax isn't put on the employer but on - get this - the insurance company, who will, of course, pass it on to the employer, plus administrative costs, who will pass it on to the employee, plus administrative costs.
    Both of your solutions, however, have the net result - one lesser so, the other more - of giving more money from the worker to the government. They get plenty, as it is.
    How about no limits on what employers provide their people, that they get to deduct as a legitimate business expense, just like direct compensation, and extend that deduction to the individual, who buys their own medical insurance, even if they don't "itemize".

  • Mickey Rat||

    Great, a Reason writer arguing in favor of an unjust progressive tax whose sole justification is social engineering for the utilitarian reasoning that we cannot do any better politically.

    Making spending on health insurance payments nontaxable or taxable across the board makes more sense and would be just.

  • Fairbanks||

    This.

  • dbw1977||

    Let's get rid of healthcare insurance, totally.

    You want to get better, pay a doctor. Directly.

    You'd be amazed how much less it actually costs.

  • jrom||

    We have the world's greediest healthcare community. They could care less about your health problems, only your money has any importance to them!

  • Fairbanks||

    So you don't have auto insurance, or home insurance, or any kind of insurance?

  • retiredfire||

    Is medical "insurance" anything like those?
    Does your car insurance pay for a breakdown?
    Does your home insurance pay for a new paint job?
    What is called medical insurance is not what most people think of as "insurance" - a small payment, not generally used, to protect from a catastrophic, yet rare, expense. Many insurance policies never pay a claim, and that's how they become so inexpensive versus what you might have to get paid for a claim.
    Medical insurance is expected to be used, regularly. How does that result in the payments being small, to accumulate, along with others, who don't make a claim, to let the insurance company have enough to pay off the claim?
    Oh, wait a minute, insurance companies are evil and deserve to spend their own money to let us get free treatment. Sorry, I forgot.

  • MokFarin||

    I ran into a ridiculous situation with the insurance company I'm with. They wouldn't authorize an MRI that my wife's doctor wanted. They interfered with diagnostics to get a cheaper MRI (their notice in the mail said that this was the only reason they interferred).

    Only, the MRI they wanted wasn't offered by the place we went to, we had to go across town where they had an MRI machine capable of the "cheaper" treatment, which was $225 more expensive. I spent two weeks on the phone with them telling them they were a bunch of bleeping retards.

    Then we went back to the original place our doctor referred us to and not only did we not pay the $225 extra, we paid directly and got the service for $150 LESS via direct pay than we would have gotten via the insurance company.

    This....is not what insurance is. Insurance is a hedge against a major incident. Home insurance you get for fire, earthquake, meteors, and other such fun, and large, incidents. The chance of such incidents is so small that you pay a small sum each month to cover for them. The same is true in auto insurance.

  • Empress Trudy||

    The only plausible solution is to do away with health insurance.

  • jrom||

    You know if we did away with health insurance, our greedy doctors, dentists, hospitals, and drug companies would be forced to dramatically, lower their prices. Maybe by as much as 80%. By people having health insurance, no one cares how much things cost. That allows the money grubbing healthcare establishment to charge as much as they want.

  • retiredfire||

    Good luck with that.
    What about the po folks, out there?
    That's how they get their fingers in the pie.

  • MokFarin||

    Rejigger medicare to be government employed doctors on a salary.

    On the plus side, the poor would have a pretty big incentive to get not-poor anymore.

  • Ken in NH||

    I wish that we had health insurance. What we have is one of those maintenance plans that car dealership "finance managers" try to sell you. You know the ones where you pay up front for your oil changes and air filters instead of being financially responsible and budgeting for routine maintenance and paying for it when needed.

  • jrom||

    Ken in NH,
    I had a friend that worked for the federal government for 20 years. He worked for NOAA. He spent most of his time playing cards and drinking on a boat and consuming T- bone steaks and fresh fish on the tax payer dime. After he retired in 1995, him and his wife both live off nearly a 60 thousand dollar a year pension, plus free dental, vision, and healthcare for life with no deductible. Neither him or his wife have worked since they were in their early forties. He also gets about a 4 percent raise every year on his pension. And they always vote Democrat; because, the Dems want them to have even much more benefits. I know of a retired member of the House of Reps, who gets well over 100 thousand a year from the tax payers. He was in Congress, from 1992-2010. All of this why we have to pay for our own insurance and fund our own retirement. Fed judges, prosecutors, and law enforcement also get a six figure pension plan.

  • jrom||

    I forgot to mention that IRS agents get a six figure pension plan as well. And remember, millions of current and former federal workers don't even bother to pay income tax on their wages and pensions. And the IRS lets them get away with it.

  • Steve Bumgardner||

    Paint with a broad brush much?

    I worked for the Federal government for fifteen years. I ran a powerhouse on an Army base. I shoveled coal. I worked in an environment 10 degrees hotter than outside all year 'round. I got industry standard pay, and no more than adequate benefits.

    No all government employees are pigs at the trough.

  • jrom||

    Steve Bumgarder,

    I speak the truth. You just don't want to admit it. However, you worked for 15 years, you needed to work for 5 more years to get the pension and healthcare package for life. That is the reason why you don't get any pension benefits.

  • jrom||

    Also, I should point out that my friend who worked for NOAA had the 20 year minimum needed for a pension and had a good rank. Officers get much better pay than enlisted people. However, members of congress can get a pension with full healthcare benefits, after just 4 years in office.

  • Ken in NH||

    I'm not sure what your reply has to do with mine. I wasn't pining for government funded "health insurance", but for true health insurance; which is now called catastrophic insurance and is all but illegal to sell these days in most states. Nobody pays car insurance expecting it to pay for their oil changes or tire rotations. They know that car insurance pays for unplanned, expensive contingencies. You can add riders or some come with little perks like free windshield repair or replacement and rental cars, but no one must buy those and people who cannot afford expensive insurance get the basics. (Whether minimum liability car insurance should be government mandated is another argument for another time.) The same should be true for health insurance. I have a young, healthy family. I can afford the occasional doctors visit or stitches. I cannot afford a long hospital stay or major surgery. That is what I need health insurance for; not yearly physicals and shots.

  • MokFarin||

    I believe that the health maintenance plants should be offered to anyone that wants one. At the same time, catastrophic plans should be the norm.

    Also, if you are ever in the finance managers' office at a dealership, buy the maintenance contract and NOT the service contract (which is what you described). :)

    The maintenance contract covers large repairs for about 1/4th to 1/3rd the price of the vehicle. On new cars you plan to get rid of in 5-6 years, don't bother. For used vehicles or new vehicles you plan to keep longer, you should get it for 100,000 miles or more starting at the odometer reading you purchased it at.

  • Cytotoxic||

    This is horrible. No Hinkle, the proper way to counter a distortion is NOT with more distortion. You provide no evidence that the Cadillac tax will 'work'.

  • Ken in NH||

    So the solution to a ridiculous and unsustainable situation is to try to sustain it with a Pigovian tax? Did I stumble onto HuffPo or The Weekly Standard?

  • muskegonlibertarian||

    We could have done everything possible to reduce the cost of health care, including repealing all the laws and regulations that make US health care the world's most expensive. Elimination of prescription laws, elimination of medical licensing (replaced by certification) along with all the laws and regulations that hospitals enjoy that allow them to keep their prices high. In effect completely eliminate all laws and regulations that service to benefit some over others... Which would have given us far lower health care costs, effectively "affordable" health care instead of "Obamacare".

  • jrom||

    Now that would be real healthcare reform!

  • retiredfire||

    Don't forget making the feds pay full-fare for Medicaid and Medicare treatments, so that the medico's don't have to make it up by charging everyone else more.

  • AD-RtR/OS!||

    If anything we need to increase the Cadillac Tax.....Caddy owners can certainly afford it.

  • Jayburd||

    "It would be a grievous mistake indeed if Congress were to repeal one of the few parts of Obamacare that might actually work".
    So you read it here first folks! Wealth redistribution works! What you don't read here are words like liberty or freedom. Inside the chic-way I guess.

  • Steve Bumgardner||

    Hey A., how long have you been a closet Democrat? Or are both parties really chock full of progressives?

    Tell me again why taxation isn't theft. An Amendment authorizing theft doesn't make it any less theft.

    Remember this one?: A law repugnant to the Constitution is no law at all.

    Roberts' PPACA decision represents bad behavior on the bench. The only thing the Constitution authorizes the Congress to require the people buy are arms with which to defend the Nation. The poor guy is clearly intellectually defective, not to mention dishonorable.

    Now rather than support the Constitution by calling for an end to this pathetic Judicial madness, you want to make sure everyone gets taxed enough. Where does your progressive "enough" end?

  • jrom||

    Excellent point, Steve Bumgardner, we at least agree on this point. We should not be required to buy government approved healthcare plans. And high taxes do seem to amount to theft.

  • Win Bear||

    Because someone else was giving them ever-more-generous health coverage, recipients had ever less reason to control costs or guard against waste. The result: a skyrocketing, ultimately unsustainable increase in national outlays for health care.

    Employer coverage is responsible for skyrocketing health care cost: tax breaks for employers have encouraged group coverage contracts, and once people are part of group plans, they have no incentive to keep health care costs down individually. But that mechanism operates across all plans, expensive or not.

    Imposing the "Cadillac tax" on generous health plans, however, does not remove the lack of incentive for individuals to keep costs down. Employers that provide such coverage will continue to do so, but they will most likely just take the tax out of employee raises, or they'll suck it up.

    The "Cadillac tax" is simple class warfare, the idea that better off people should be penalized for being better off; the false idea that the best health care system would be one that offers the same health care to everybody regardless of means.

  • beyond.reasons||

    Hurray for talking about the history behind health care "benefits". There is no reason for employers to pay for health insurance and needs to be changed to a system that makes individuals responsible for their own insurance - just like auto or house insurance. This needed to happen years ago. Further, there is no reason for the insurance company to be involved in day to day health care like routine doctor visits. Health insurance is there for things that are unexpected and BIG -- like surgeries and major illnesses. People who talk about this are just drowned out by the drumbeat of entitlement. I don't understand the point of keeping the Cadillac Tax -- the whole system as it is just needs to be scraped.

  • Bob Meyer||

    Ending HSAs is part of the plan to force everyone onto a state health system. The money in the HSA is controlled by the consumer. That is anathema to the single payer advocates. No one must ever be in control of their own healthcare.

    Labor unions are already exempt from the Cadillac tax which provides an incentive for employees to join unions, another Obama / Left goal.

    How can an HSA, which is nothing more than using your own money to pay for medical care, be considered a benefit from your employer? How about the money that you pay to your employer to get healthcare coverage? Should that be considered a benefit also? Since neither is taxed I guess they both should count the same.

    I agree that the entire third party payer insurance system needs to be scrapped. Keeping the Cadillac tax will not bring us any closer to that goal.

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