The “Cadillac Tax” on Health Benefits in the United States Will Hit the Middle Class Hardest

Refuting the Myth That Health Benefit Tax Subsidies Are Regressive

By Steffie Woolhandler, David U. Himmelstein
International Journal of Health Services, Online March 9, 2016

Abstract

U.S. employment-based health benefits are exempt from income and payroll taxes, an exemption that provided tax subsidies of $326.2 billion in 2015. Both liberal and conservative economists have denounced these subsidies as “regressive” and lauded a provision of the Affordable Care Act — the Cadillac Tax — that would curtail them. The claim that the subsidies are regressive rests on estimates showing that the affluent receive the largest subsidies in absolute dollars. But this claim ignores the standard definition of regressivity, which is based on the share of income paid by the wealthy versus the poor, rather than on dollar amounts. In this study, we calculate the value of tax subsidies in 2009 as a share of income for each income quintile and for the wealthiest Americans. In absolute dollars, tax subsidies were highest for families between the 80th and 95th percentiles of family income and lowest for the poorest 20%. However, as shares of income, subsidies were largest for the middle and fourth income quintiles and smallest for the wealthiest 0.5% of Americans. We conclude that the tax subsidy to employment-based insurance is neither markedly regressive, nor progressive. The Cadillac Tax will disproportionately harm families with (2009) incomes between $38,550 and $100,000, while sparing the wealthy.

http://joh.sagepub.com/content/early/2016/03/08/0020731416637163.abstract

PNHP press release:
http://www.pnhp.org/news/2016/march/‘cadillac-tax’-on-health-benefits-will-hit-middle-class-hardest-study

The “Cadillac tax” is an excise tax on premiums of more expensive employer-sponsored health plans. It was included in the Affordable Care Act partly as a revenue source to help pay for ACA, partly to offset the tax subsidies for employer-sponsored insurance that were more generous for higher income individuals, and partly to reduce the incentive to purchase more insurance than necessary under the theory that making patients more sensitive to health care costs will prevent spending on supposedly excessive health care services (certainly a contentious point).

Because of the high costs of health care, we do need funding mechanisms that result in a transfer to those less able to pay. The Cadillac tax is a problem because, instead of disproportionately assessing the very wealthy, it impacts primarily working families. Not only is the tax unfair, the health plans will likely have their benefits reduced in an effort to escape the taxes.

In a PNHP press release (link above), Steffie Woolhandler, one of the co-authors of the report, stated, “Taxpayers should be paying directly for health care through Medicare-for-All, not indirectly through tax subsidies to private insurance. However, removing the tax subsidies – as Obamacare will do – without setting Medicare-for-All in place is a step backwards. It’s shameful that economists have provided cover for this tax that will hit middle-class families and largely spare the wealthy.”

The Cadillac tax is just one more example of the flawed policy patches required simply because the architects of reform decided to build on our current dysfunctional, fragmented financing system instead of replacing it with a more efficient, effective and equitable single payer Medicare-for-all program. That doesn’t mean that we have to live with our highly flawed system. We can still change it.