The Case For Temporarily Exempting Union Health Benefits From The Excise Tax

The White House has agreed to exempt collective bargaining agreements from the Cadillac tax until January 1, 2018 and increase the threshold of the plans affected by the tax.

Beginning on January 1, 2013, a family plan that costs more than $24,000 and an individual policy valued at $8,900 will now be subject to the 40% excise tax, labor leaders said during a conference call outlining the new compromise. The new provisions would reduce the estimated revenue from the excise tax by $60 billion, forcing lawmakers to make-up for the lost revenue by increasing the payroll tax (which would still hit union members) or applying it to investment income.

AFL-CIO President Richard Tumka laid out the other compromise provisions:

The threshold can also be adjusted further in three ways: if between 2010–2013, inflation increases higher than expected, if plans have a high number of older workers, women, high risk individuals and qualified retirees.

– Beginning in 2015, dental and vision benefits will be excluded from the cost of the plan.

– Collective bargaining agreements would be able to go into the exchange beginning in 2017.

Critics will interpret the temporary exemption as a special interest carve out for a vital political constituency, but it makes perfect policy sense. Unlike non-union labor negotiations which can be re-negotiated annually, collective bargaining agreements tie unions down for multiple years. The temporary exemption allows them to get out of the way of a moving train. After all, collective bargaining agreements are not the same as raise negotiations for non-union employees. While the latter operates under the implicit assumption that a certain percentage of compensation is dedicated for health benefits and is exempt from taxation, a union collective bargaining agreement enters into an explicit trade off between taxable and nontaxable compensation.


Typically, a union negotiates a certain dollar agreement from the employer for total compensation as well as how that will be divided between wages and benefits. The employer could agree to compensate its workers $30 per hour and the union would decide to allocate $20 to wages and $10 to health care. Or, it may choose to spend $15 on wages and $15 on health care. Whatever the case, the unions weighs the benefits of receiving tax deductible health benefits with the immediacy of higher wages and agrees to abide by the agreement for several years.

Without an exemption period, the excise tax would change the rules midstream. Non-union workers with expensive health care benefits could change their compensation package in anticipation of the new tax, but unions with health policies of above $24,000 would pay higher taxes until their contract expires. The temporary exemption still accomplishes the goals of the excise tax — pushing people into lower cost health care plans — but gives unions more time to change their behavior and switch to cheaper policies.

Still, some progressives are not amused. Over at FireDogLake, Michael Whitney argues that “if unions take this ‘deal,’ if the labor movement decides to fold and exempt themselves from the excise tax, they fulfill one of the worst of stereotypes of labor unions: blind self interest. By abandoning the nonunion middle class and protecting only their own, the labor movement is throwing any hope of future relevancy out the window.” On the call, Trumka argued that “we were able to do something that will help everyone out there.” “We’ve increased the threshold for everybody. The age and the gender adjusts for everybody taking out vision and dental out of threshold is for everybody,” he argued.