“Cadillac Tax” Will Hit 38 Percent of Employers in 2018

The “Cadillac tax” is the excise tax on high-value health plans, which goes into effect in 2018. If the value of health benefits exceeds $10,200 for an individual or $27,000 for a family, the excise tax will be 40 percent.

A new report from the American Health Policy Institute breaks down the effect on employers. As well as concluding that the Cadillac tax will hit 38 percent of employers in 2018, it estimates that the average employer-based policy will be subject to the tax by 2031.

There is no doubt the Cadillac tax will put an administrative burden on employers, and reduce the attractiveness of employer-based benefits. On the other hand, as the AHPI report notes, the Cadillac tax will cause employers to increase workers’ wages in exchange for reducing health benefits. Indeed, the Congressional Budget Office anticipates that 75 percent of the revenue due to the Cadillac tax will be from income and payroll taxes due to wage increases, and only 25 percent due to the Cadillac tax itself.

Notwithstanding the tax hike, shifting workers’ income from benefits to money improves their welfare, because workers are free to spend their money on whatever they like. Also, the current exclusion of employer-based benefits from taxable income is a “tax expenditure” of over $785 billion over the next five years.

That is not a subsidy, as some assert, because it only reduces people’s taxes. It doesn’t get paid out to people who do not pay taxes. However, it does create a hole in the Treasury that prevents other tax cuts.

Is it fair to give employees an unlimited tax break if they get health benefits from an employer, but not if they choose their own health insurance? And while a plurality of citizens probably accept that a certain amount of health spending should be tax free, should it be unlimited?

Most free-market health reformers reject this notion, and they include some type of Cadillac tax in their reform plans, in exchange for a fairer tax benefit.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

John R. Graham is a Senior Fellow at the Independent Institute.
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