Twice delayed, now scheduled to take effect in 2022
by Paul Fronstin, PhDMr. Fronstin is Director of the Health Research and Education Program at Employee Benefit Research Institute (EBRI). Reprinted with permission. Visit here.
The excise tax on high-cost employment-based health plans, also known as the Cadillac tax, is a provision from the 2010 Patient Protection and Affordable Care Act (ACA). When the ACA passed in 2010, the Cadillac tax, a nondeductible 40 percent excise tax imposed on the portion of health coverage costs that exceeds $10,200 for single coverage and $27,500 for family coverage, was scheduled to take effect in 2018. It has since been delayed twice and is currently scheduled to take effect in 2022. By 2022, the portion of health coverage costs that exceeds $11,200 for single coverage and $30,150 for family coverage will be subject to the tax.
The justification of this new tax on employer-provided employee benefits was to mitigate the rising cost of health care and to generate tax revenue to pay for other provisions in the ACA. While the Cadillac tax is controversial for a number of reasons, a key question remains — will the tax produce federal tax revenue as predicted? The tax was expected to generate tax revenue because as employers cut back on the generosity of health benefits, it was expected that workers would receive higher wages in return. While it is debatable as to whether higher wages will materialize, higher tax revenue may still appear if the savings from less generous health benefits are used for other purposes that result in taxable income.
So, will the Cadillac Tax generate revenue?
When the ACA passed in 2010, the Cadillac tax, a nondeductible 40 percent excise tax imposed on the portion of health coverage costs that exceeds $10,200 for single coverage and $27,500 for family coverage, was scheduled to take effect in 2018. It has since been delayed twice and is currently scheduled to take effect in 2022. At that point, the portion of health coverage costs that exceeds $11,200 for single coverage and $30,150 for family coverage will be subject to the tax.
The Cadillac tax is controversial. It is the first time that the historically unlimited tax exclusion for employment-based health benefits has been impacted. Although it has its enthusiasts, there has been bipartisan support for repealing it.
In May 2018, the Congressional Budget Office (CBO) estimated that the tax would generate $168 billion in tax revenue from 2022 to 2028. The Joint Tax Committee (JCT) and CBO assume that when employers reduce the comprehensiveness of health benefits to avoid the tax that they will in turn increase worker taxable wages such that total compensation is unchanged. Shifting the composition of compensation toward a higher proportion of taxable wages will translate into additional tax revenue. Repealing the tax would mean finding $168 billion (or the equivalent in today’s dollars) in new tax revenue.
Why is understanding the wage-benefit tradeoff so important? Research on the tradeoff has focused almost exclusively on what happens to worker wages when the cost of health insurance increases. The literature on the wage-benefit tradeoff is being used in such a way that it assumes that wage responses to health insurance cuts and health insurance cost increases are symmetric. Only one study on the wage-benefit tradeoff has been found that examines what happens to worker wages when the cost of health insurance decreases, as would be the case with the Cadillac tax. It examined the impact of community rating in New York State on the wages of older workers in small firms, firms that would see premium reductions as a result of community rating, and found that older workers in small firms saw their wages increase relative to workers in large firms and workers in other states. However, it is possible that wages do not respond symmetrically to increases and decreases in the cost of employment-based health insurance. There is evidence of asymmetric effects in other aspects of health care, labor markets, and elsewhere that could inform the economic theory on wage-benefit tradeoffs.
Even if workers’ taxable wages do not increase as a result of employers reducing the comprehensiveness of health benefits, the added tax revenue may still be realized. If employers kept the savings and those savings became corporate profits, they might become partially taxable as dividends and increased capital gains, thus producing higher federal tax revenue. If employers use the savings to purchase capital equipment, the seller of that equipment would see higher sales, which would result in federal tax revenue through a combination of profits, higher worker wages from sales bonuses, and worker wages possibly associated with the cost of installing the equipment. If employers used the savings to grow the business and hire additional workers, those workers would be paid wages that were taxable.