"The omnibus spending bill recently passed by Congress and signed into law by President Obama delays the onset of the Affordable Care Act (ACA)’s so-called “Cadillac plan tax” for two years. The new law also weakens the effect of the tax (assuming it’s ever collected) by making it deductible, as noted by my Mercatus Center colleague Brian Blase. I agree with former OMB director Peter Orszag’s observation that the delay may simply be a first instance of a “rolling permanent deferral” of the Cadillac plan tax.
The tax has long been on shaky political ground and the new law considerably reduces the chances of its ever taking effect. It is worth understanding what caused the unraveling of the tax, and what lessons can be drawn from this.
The Cadillac plan tax is (was) a 40% excise tax on the amount by which health insurance plan costs exceeded annual thresholds of $10,200 (individuals) or $27,500 (families), starting in 2018. These thresholds were indexed to grow more slowly than historical health cost growth, so that over time more and more plans would be subject to the tax, producing escalating federal revenues necessary to help fund the ACA’s ambitious health entitlement expansion. A key policy intent of the tax was to offset the damaging effects of the longstanding federal tax preference for employer-sponsored insurance (ESI), one of which is to drive excess health cost inflation.
Lesson #1: Save before you spend.
Lesson #2: Don’t assume a favorable future political alignment.
Lesson #3: Be transparent.
Lesson #4: Partisan victories can be short-lived.
Lesson #5: Don’t campaign against necessary policy steps."
- Five Lessons of the Cadillac Plan Tax Failure, Economics 21, Manhattan Institute, 12/22/2015
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