Obamacare’s Cadillac Tax Is A Clunker

Consumers are trying to figure out how they’ll absorb the double-digit increases in health insurance premiums that many insurers have announced for next year. American employers, meanwhile, are worried about what will happen to health costs several years out, in 2018.

That’s because 2018 is when one of Obamacare’s most onerous taxes takes effect — the “Cadillac” tax. The levy will apply to employer-provided insurance plans deemed too costly by the federal government.

The Cadillac tax is meant to lower the nation’s healthcare tab by discouraging companies from offering overly generous health plans. But Obamacare’s many mandates will eventually make every plan so costly that it qualifies as “overly generous.”

Consequently, this tax designed to reduce overall health spending will actually force Americans to pay even more for health care. It’s time for this Caddy to hit the junkyard.

Obamacare defines a “high-cost” insurance plan as one whose premiums exceed $10,200 for individuals and $27,500 for families. Any costs above those figures will face an excise tax of 40 percent. In its first year alone, the provision amounts to a $5 billion tax hike. It will grow to $13 billion by 2020. All told, the Obama administration is counting on the tax to raise $87 billion through 2025.

The Cadillac tax will have a far-reaching impact. According to the National Business Group on Health, almost half of large employers will face the tax in its first year. Within 10 years, 94 percent of firms will be subject to the tax.

The tax leaves employers with few options.

Businesses could just eat the additional costs. But that would cost them an average of $2,700 per worker per year between 2018 and 2024.

Employers could also pick a plan with a lower price tag, but then workers would see their healthcare benefits axed by as much as $6,150 — with little or no raise to offset the loss.

Even employees receiving raises to offset the benefit cuts would take a hit. They’d be forced to pay an average of $1,050 in higher payroll and income taxes each year.

Making matters worse, the Cadillac tax doesn’t sufficiently account for medical inflation. Instead, the thresholds only grow at the rate of overall inflation plus 1 percent. That’s problematic because, in the past four years, employer premiums have surged an average of 5.2 percent a year — more than double the rate of general inflation.

In other words, more health plans will be considered “Cadillacs” every year. By 2030, the levy will ensnare the majority of Americans’ plans.

The Cadillac tax is projected to even hit high-deductible plans paired with Health Savings Accounts, which are expressly designed to reduce overall healthcare spending by giving patients more control over their healthcare dollars. These tax-advantaged accounts allow consumers to save money for routine health expenses — and keep whatever they don’t spend from year to year.

But Obamacare counts contributions that employers and individuals make to HSAs toward the Cadillac tax thresholds. Next year’s HSA contribution limits are $3,350 for an individual and $6,750 for a family. So it won’t be hard for someone socking money away in an HSA to cross the line after which the Cadillac tax applies.

Penalizing people who are trying to keep their premiums in check by taking on high deductibles would seem to be at odds with the Cadillac tax’s original intent. But that’s exactly what the tax will do.

It’s little wonder, then, that not just Obamacare’s critics but labor unions, higher education administrators, and even local governments are concerned about the Cadillac tax.

So is Congress. Rep. Joe Courtney (D-Conn.) and Rep. Frank Guinta (R-N.H.) have each introduced bills of their own that would repeal the Cadillac tax. Courtney’s bill has 118 Democratic co-sponsors.

President Obama would no doubt veto any effort to repeal the tax. But his successor may prove more pliable.

Republicans, of course, are universally opposed to the tax. So if the GOP takes the White House, the Cadillac tax is as good as gone.

Democratic front-runner Hillary Clinton is no fan of the tax, either. She told the American Federation of Teachers earlier this year that she’s concerned that the Cadillac tax “may create an incentive to substantially lower the value of the benefits package and shift more and more costs to consumers.”

The Cadillac tax stands out as yet another example of the Affordable Care Act failing to live up to its name. President Obama’s own party wants to see the levy repealed. They may have to wait for him to go first.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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