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The Case For Taxing Cadillac Health Care Plans

By Igor Volsky on October 20, 2009 at 6:20 pm

"The Case For Taxing Cadillac Health Care Plans"

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Cad2The Center on Budget and Policy Priorities has given its stamp of approval to a controversial provision in the Senate Finance Committee’s health care bill that would impose a 40% surtax on insurers that offer coverage that exceeds $8,000 for individuals or $21,000 for families. The tax would apply to “the portion” of the plan that exceeds those amounts.

The tax enjoys bipartisan opposition. Labor unions and conservative critics both argue that the provision will lead to unintended consequences, inadvertently taxing individuals in high-risk professions, union members with collective bargaining agreements, or older populations whose health care plans aren’t so much ‘overly generous’ as they are just plain old expensive. But proponents of the measure contend that the Finance Committee’s revised proposal would protect individuals in the aforementioned categories — individuals in so-called Chevy plans — slow the rate of health care spending, and help finance health care reform.

The Center has thrown down its gauntlet with the latter, arguing, in a new report released today, that “an excise tax on very high-cost health plans” “represents a sound way to help pay for health reform”:

The excise tax finances nearly a quarter of the costs of the Finance Committee bill over the first ten years ($201 billion out of $829 billion) and makes a major contribution to the deficit reduction that the bill would achieve in later decades. It would help to slow the rate of health care cost growth, without which health care reform is not likely to be sustainable over time….Of particular note, the excise tax produces savings that rise over time at least as fast as the costs of providing health insurance to those now uninsured. Some important aspects of the tax are widely misunderstood. For example, as the Joint Tax Committee’s analysis of the Finance Committee’s proposal shows, over 80 percent of the revenue generated would come not from the tax on insurance premiums itself, but from income and payroll tax revenue on the tens of billions of dollars of higher wages that workers would receive — as employers modified their health plans to avoid the excise tax and converted what they had been spending for health coverage in excess of the tax thresholds into higher wages and salaries. Indeed, one largely overlooked side benefit of the proposal is that by receiving higher wages and paying somewhat more in payroll taxes, most affected workers would qualify for higher Social Security payments when they retire.

Americans would respond to the tax by trying to avoid it and any unnecessary health care spending, the Center concludes. The policy will encourage employers to offer their employees less costly plans and convert the savings produced by the new policies into higher wages or other compensation. As a result, “more than four fifths of the revenue that the government would collect as a result of the excise tax would come from income and payroll tax revenue on the billions of dollars in higher wages and salaries that employees would be paid.” Only $37.8 billion would come from the excise tax itself, the JCT estimates. (Incidentally, only 7.7 percent of tax filing units would be affected by the excise tax in 2013 and 17.6 percent by 2019).

In other words, the Finance Committee provision goes a long way towards micro targeting the tax towards truly exorbitant policies. As the report points out, “the high-cost insurance plans that the tax would affect generally offer unusually generous benefits that are not available to most Americans. The executive medical and dental program at Goldman Sachs, one of the nation’s largest banks, has become the poster child for lavish health insurance plans. Goldman’s top executives participate in a medical and dental plan that costs $40,543 a year for each participant’s family — three times the national average, according to the New York Times.”

All of this is based on the theory that businesses will change their behavior and offer their employees less substantive policies — plans with higher deductibles and co payments — which will be partially offset by the new higher wages. Progressives can’t be thrilled with this result (after all, they would prefer to reduce the rate of growth by focusing on delivery reforms), but they’re happy to see the extra dollars go into financing health care reform.

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