Tag: labor leaders

Why Do You Want to Tax ‘Cadillac’ Health Care Plans?

The battle is intensifying between Democratic leaders and their labor supporters over a proposal to tax higher premium employer-provided health care plans. The proposal, which is contained in the Senate Democrats’ health care bill and supported by President Obama, would add a 40% excise tax to any amount above $8,500 paid for an individual worker’s coverage, or above $23,000 for a worker’s family. Labor leaders claim that a quarter of unionized workers would be subject to the tax, and government analysts estimate that 22 percent of all workers would be subject to it in 10 years.

A reasonable policy argument can be made for taxing employer-provided health coverage (more on this anon). That argument is not the one that the media (uncritically) reports is the chief motivation for President Obama and Senate Democrats. According to the press, the president and Senate Democrats want the tax so as to disincentivize employers from buying more comprehensive and elaborate coverage for their workers, which would mean that insurers would pay less for workers’ care and thus  “lower the cost curve.” That thinking does not make for good public policy.

To be sure, the public worries about the rising cost of health care.  But that doesn’t mean that we should embrace any policy that lowers that cost; otherwise, we would simply outlaw surgery and cancer treatments. Instead, what people want is to pay no more than they have to for the health care they want. Put more carefully, people want greater efficiency in health care (that is, more bang for their buck), not a cap or threshold tax on the care they receive.

Higher-premium health coverage does not violate this demand for efficiency. A so-called “Cadillac” plan can be broadly comprehensive and elaborate, and still be efficient, while a “Yugo” plan can be horribly inefficient. Just as important, the purchaser of that coverage (the employer, acting in place of the worker) has plenty of motivation and opportunity to consider different levels of coverage at different prices from different providers that compete on efficiency (and other dimensions). If the employer selects an expensive plan as part of its workers’ compensation, what’s the policy issue?

Sharp readers will point out that there is a policy issue in that employer-provided health care is an untaxed benefit, whereas most other forms of compensation — especially wages — are taxed. This brings us to the “anon” from above: The different tax treatments distort worker compensation, resulting in workers receiving more health care benefits and less wages than they would if all forms of compensation were treated equally. But notice that this distortion occurs when any amount of employer-provided health care is untaxed, not just the amount over $8,500 per worker or $23,000 per family.

The distortion problem is seldom mentioned in press coverage of the “Cadillac” tax proposal, and when it is discussed, it’s portrayed as a minor justification for the tax, behind the chief justification of “bending the cost curve.” And it is the latter, bogus justification that President Obama, Senate Democrats, and the press seem to be focused on.

Obama’s Health Tax Conundrum

As President Obama is finding out, spending a trillion dollars on health care reform is easy; paying for it is a bit harder. 

Both the House and Senate versions contain huge tax increases.  But they take completely different approaches toward which taxes are hiked and who would pay them.  And, as President Obama discovered in yesterday’s contentious meeting with labor bosses, those differences will not be easy to resolve.

The Senate wants to slap a 40 percent excise tax on so-called “Cadillac” insurance plans, that is plans with an actuarial value of more than $8,500 for an individual and $23,000 for a family.  The tax technically falls on the insurance company that offers the plan, but there’s widespread recognition that insurers will merely pass that tax on to their customers in the form of still-higher premiums. The Congressional Budget Office estimates that initially about 19 percent of insurance plans would be subject to the tax, and union surveys suggest that it could hit as many as 25 percent of union workers.  Moreover, as inflation drives costs higher, more and more plans will be subject to the tax.  That is because the threshold for the tax is indexed to general inflation not medical inflation which runs higher. 

As today’s Washington Post editorial points out, economists and deficit hawks see this measure as one of the few cost-control provisions left in the bill.  Its goal is not just to raise some $150 billion in revenue over 10 years, but to discourage the type of “gold plated” insurance plans that encourage over utilization and drive up costs.  That is why the Obama administration has endorsed this approach.

However, as labor leaders made clear in yesterday’s meeting with the president, this middle-class tax hike is unacceptable.  AFL-CIO president Richard Trumka has even threatened to retaliate at the polls against Democrats who vote for it.  In addition, 124 House Democrats have signed a letter opposing the “Cadillac tax.”  With just a three vote margin, House Speaker Nancy Pelosi cannot afford to have any defections from tax opponents. 

The House, on the other hand, has gone with a “soak the rich” strategy, calling for a surtax on incomes of $500,000 or more a year.  But Democrats already plan to allow the Bush tax cuts to expire next year, raising income taxes for millions of Americans.  An income tax surtax on top of that would mean marginal tax rates of more than 50 percent in many states with devastating consequences for economic growth.  Moderate Democratic Senators like Ben Nelson (Neb.) and even liberals from states with high cost of living like Chuck Schumer (NY) are unlikely to go along with this tax.  And, in the Senate, Democrats can’t afford even a single “no” vote. 

The conventional wisdom in Washington is that a health care bill is inevitable.  But if the growing fight over taxes is any indication, inevitability is overrated.