Cadillac Tax Hidden Time Bomb

Opposition to the Democrats’ health care reform plan has created some strange bedfellows, with the Hard Left and the Hard Right frequently working together.  Here’s on that I didn’t expect:  NYT columnist Bob Herbert attacking the plan from the Right.

cadillacThere is a middle-class tax time bomb ticking in the Senate’s version of President Obama’s effort to reform health care.

The bill that passed the Senate with such fanfare on Christmas Eve would impose a confiscatory 40 percent excise tax on so-called Cadillac health plans, which are popularly viewed as over-the-top plans held only by the very wealthy. In fact, it’s a tax that in a few years will hammer millions of middle-class policyholders, forcing them to scale back their access to medical care.

Which is exactly what the tax is designed to do.

The tax would kick in on plans exceeding $23,000 annually for family coverage and $8,500 for individuals, starting in 2013. In the first year it would affect relatively few people in the middle class. But because of the steadily rising costs of health care in the U.S., more and more plans would reach the taxation threshold each year.

Within three years of its implementation, according to the Congressional Budget Office, the tax would apply to nearly 20 percent of all workers with employer-provided health coverage in the country, affecting some 31 million people. Within six years, according to Congress’s Joint Committee on Taxation, the tax would reach a fifth of all households earning between $50,000 and $75,000 annually. Those families can hardly be considered very wealthy.

Proponents say the tax will raise nearly $150 billion over 10 years, but there’s a catch. It’s not expected to raise this money directly. The dirty little secret behind this onerous tax is that no one expects very many people to pay it. The idea is that rather than fork over 40 percent in taxes on the amount by which policies exceed the threshold, employers (and individuals who purchase health insurance on their own) will have little choice but to ratchet down the quality of their health plans.

[…]

The tax on health benefits is being sold to the public dishonestly as something that will affect only the rich, and it makes a mockery of President Obama’s repeated pledge that if you like the health coverage you have now, you can keep it.

Given how thin the promise that only those making over $250,000 would pay more taxes under Obama turned out to be — and almost immediately — this shouldn’t surprise anyone.

The bills that have made their way through Congress, especially the House version, have long struck me as Trojan horses.  The numbers are such that there are only two alternatives.  Either, as Dave Schuler frequently argues, the bills demonstrate how fundamentally stupid Members of Congress are on economic matters.  Or, as I suspect, they know damned well that the numbers don’t add up and the whole point is to destroy the present insurance-based system by stealth.

FILED UNDER: Economics and Business, US Politics, , , , ,
James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. steve says:

    You realize you are suggesting that no tax rate can ever be changed, or at least this writer is suggesting it and you are supporting him. I think we should tax health insurance anyway, so I cant say that this bothers me much. My bigger worry is that they will increase the tax exempt amount.

    Steve

  2. James Joyner says:

    If indexing to inflation isn’t built into the plan, the either 1) these people are morons or 2) they intend it as a stealth tax. Bracket creep is a long-known phenomenon.

    I’m not opposed to taxing benefits, since they were designed as a stealth way around the income tax. But, again, Obama continually promises that people’s current plans won’t be affected.

  3. Armando says:

    James:

    Inflation indexing would defeat the purpose of the tax – which is to force reductions in health insurance coverage for workers (my own view is that the true Cadillac plans will remain in place, subject to the tax – which will raise some money, but not that much.)

    But you are wrong to call this a critique from the Right. Like me, Herbert prefers the House financing scheme which includes a surtax on person making over 500k/ year to pay for the extension of health insurance coverage through the expansion of Medicaid and the subsidies (to be honest, I really do not support the subsidies – my preference is for expanding Medicaid even more. It is much cheaper and can reach much higher.)

  4. laurie says:

    From expert health care economist J. Gruber:

    “So in the end, we have a policy that provides the necessary financing to pay for subsidies to low-income families; induces employers to buy more cost-effective health insurance, lowering U.S. health-care spending; offsets a bias in our tax system that favors more expensive insurance; and raises wages by $223 billion over 10 years. To put a twist on an old saying: The Senate assessment on high-cost insurance plans doesn’t walk like a tax or talk like a tax — because it is not a tax. It is an innovative way of financing the health reform we so desperately need.”

    http://www.washingtonpost.com/wp-dyn/content/article/2009/12/27/AR2009122701714.html

  5. The problem with what Herbert writes is that this will affect way more than 20%. Companies, particularly large companies, are already paying more than $8,500 per year per employee to provide health insurance. In some cases, the cost paid by the company is $10k to $12K, which is why so many are switching to Health Savings accounts, which brings the costs down to $6k to $8k. Of course, the Senate bill discourages HSAs. Shocker.

  6. Zelsdorf Ragshaft III says:

    They, in congress are not stupid. These bills were written with the express purpose of socializing health care in America. If not today, tomorrow. It is all about control and never about service. Both of these bills are unconstitutional as there is no guaranteed written right of the services provided by another. There is no right to health therefore no right to health care. You are free, however to seek the wherewithal to pay for the services required. What a concept. Earn and pay. Who whould have thought of that?

  7. JKB says:

    Well, the creeping cadillac tax has been known for months. Question is, did they exempt federal employees from it as two Dem. VA reps requested in October? Wouldn’t want those victimizing the population from the hundreds of new agencies and offices under Obama’s healthcare to be treated like regular citizensvictims.

  8. anjin-san says:

    Of course, the Senate bill discourages HSAs.

    Which makes pretty good sense, considering the track record of American’s as savers…

  9. PD Shaw says:

    anjin-san, then why don’t we just mandate that Americans save money?

  10. steve says:

    Yeah, like they do in Singapore.

    Steve

  11. JKB says:

    Which makes pretty good sense, considering the track record of American’s as savers…

    To paraphrase George Carlin: You won’t save so we won’t let you.

    To be fair, HSAs reward those with self-discipline, independence and willingness to take control of their own health costs. Not something the Progressives want to encourage, regardless of their mindless prattling. It would lead to disparate outcomes for those who would rather spend their money on Che t-shirts and airline flights to fight global warming than plan for a medical needs.

  12. M1EK says:

    HSAs do nothing of the sort. They reward savers in proportion to their marginal tax rate – which for most uninsured people is pretty damn low, if not zero. Of course, they’re a nice (albeit small) tax dodge for the wealthy.

  13. Stan says:

    Evidently, James Joyner knows more about the economics of health care than John Gruber and Uwe Reinhardt. I wonder if he could tell us where they go wrong.

  14. sam says:

    In fact, it’s a tax that in a few years will hammer millions of middle-class policyholders, forcing them to scale back their access to medical care.

    Uh, I thought this was a desideratum as it will (theoretically) bring down prices.

  15. Drew says:

    “Evidently, James Joyner knows more about the economics of health care than John Gruber and Uwe Reinhardt. I wonder if he could tell us where they go wrong.”

    Comments like this fascinate me. First, the narrow point was that many middle class taxpayers face a tax increase, at odds with campaign promises.

    More broadly, we have 3 major government pension and health care schemes currently in place: Social Security, Medicare and medicaid. All have wildly (WILDLY) exceeded cost estimates at program inception. (Not to mention that vast majority of other govt programs.)

    So Wizard of Oz economists like Gruber can pontificate all they want. The historical empirical evidence has shown the Gruber’s of yesteryear to be overly optimistic boobs. And so one suspects, barring the willful suspension of disbelief, Gruber will also be.

  16. M1EK, HSAs are not a tax dodge for the wealthy. In fact numerous companies are switching over to them in order to reduce costs. Remember the potential strike with AT&T? That was about moving bargained employees to HSAs. IBM has. Nortell has. Some other companies that friends work for here in the Raleigh area have.

    Unless you are saying that union employees are “the rich.”

  17. M1EK says:

    William, HSAs are a tax dodge for the wealthy – and many middle-class folks have allowed themselves to be fooled (or bought off) by companies contributing extra in-lieu wages to them. In your examples, it’s even more ridiculous to claim that they help the rank-and-file when the rank-and-file are actively fighting the switch (for good reason: they can actually do math).

    It doesn’t change the fact that John Mackey, for instance, ‘saves’ roughly 35% on every dollar he contributes to his HSA, while his cashier likely ‘saves’ 0 (marginal federal income tax rate for cashier likely nothing).

  18. anjin-san says:

    In fact numerous companies are switching over to them in order to reduce costs.

    Great deal for the CEO, he gets a few million more on his Christmas bonus. Of course rank & file guys get reduced compensation and less health care, but that is tough titty for them…

  19. Stan says:

    Drew, the choice in health care is the bill the conference committee will report or the status quo. I say this because if the present effort to reform health care fails the Democrats won’t try again for a long time. And I don’t expect much from the Republicans, considering their inaction on health care reform during the first six years of the Bush administration. Gruber and Reinhardt have spent their lives studying the economics of health care, and both feel that the present bill makes serious efforts at cost control. I trust them more than Joyner because a) they know more about the topic than he does, and b) I think they’re less ideological than he is.

  20. anjin-san says:

    And I don’t expect much from the Republicans, considering their inaction on health care reform during the first six years of the Bush administration.

    Thats a pretty realistic expectation. Health care costs went up what, about 110% during the Bush era?

  21. Duracomm says:

    IRS Issues Inflation-Adjusted HSA Limits for 2009

    This table indicates that in 2008 HSA contributions were limited to $2,900 and in 2009 the amount was $3,000.

    At a 35% saving in tax rates that would amount to about $1,000 in tax savings. This is a trivial amount for the wealthy and the idea that HSA are an effective tax dodge for the wealthy is completely laughable.

    However, since HSA contributions are pre tax it provides considerable benefits to the middle class. Since contributions are pre tax an HSA provides at least a 35% discount on medical services and supplies to plan participants.

    And if HSA money is not spent it grows in an account that can be used to pay for future unexpected medical expenses and eventually retirement income.

    Good health cost savings for the middle class, trivial tax benefits for the wealthy.

    The only reason I can see for progressive angst over HSA is that they don’t understand how they work.

  22. Duracomm says:

    The Alternative minimum tax provides an example of why inflation indexing is crucial in the tax system.

    How did the Present Alternative Minimum Tax come into Existence?

    By Bonnie Goodman

    This controversial tax was enacted as part of the Tax Reform Act of 1969 to target the rich.

    But because the rates were not adjusted for inflation, it now targets not only the rich but also the middle class,

    Who were the original targets of the AMT?

    He explained, according to the Washington Post, that in 1967 there were a total of 155 individuals with incomes over $200,000 who did not pay any federal income taxes; twenty of them were millionaires.

    Who did the AMT end up hitting?

    The New York Times reported that “by 2010, nearly 30 million taxpayers will be hit — among them, a staggering 94 percent of married filers who have children and make $75,000 to $100,000.”

    Once again liberals / progressives shoot at the wealthy and hit the middle class.

    Not indexing taxes is government economic cruelty at its best.

  23. M1EK says:

    Duracomm, you’re a fool if you think the typical middle class family pays 35% in marginal income tax – and for the wealthy, every tax dodge counts. The executives at the last couple companies I worked at maxed out their HSAs as tax-free savings. Of course, they aren’t the idle rich, so maybe they’re not who you were thinking about, but they were definitely in the top 5% of earners.

    The true lie, of course, is that HSAs can do anything for coverage. The people who can’t afford insurance today are heavily correlated with those who pay a 0% marginal federal income tax rate.

  24. M1EK says:

    Also, Duracomm, it’s you who doesn’t understand how they work (or are trying to mislead) if you use the individual contribution figure. The family contribution is far more relevant – and for somebody earning, say, $200K, sheltering $6K or so every year from taxes is a significant win over time.

  25. Duracomm says:

    M1EK,

    Apparently you did not get the memo but Obama said folks making under $250,000 a year would not have their taxes increased.

    HSA help out poor free lancers far more than it does the wealthy.

    The 15% tax rate starts at $8,350 dollars taxable income, social security and medicare tax are around 15 percent.

    Since HSA contributions are pre tax a low earning free lancer with an HSA would save around 30 % on medical expenses.

    Why do you hate poor free lancers so much?

    2009 tax table

  26. M1EK says:

    Duracomm, the “poor freelancer” who has enough disposable income to shelter enough of it to make any difference at that marginal tax rate (which you dishonestly frame as applying at a much lower income level than it truly does, BTW, since that $8350 is after all relevant deductions and ignores other tax credits like the EITC) is as much of a myth as Reagan’s welfare queen.

  27. Duracomm says:

    M1EK,

    Your flailing around is entertaining to watch. The $8,350 is not a myth it is from the IRS tax tables.

    You still don’t comprehend that the HSA provides a discount on medical services equivalent to the combined tax rate a person pays.

    The increasing irrationality of your comments makes it apparent that the thought of someone taking individual responsibility for their healthcare needs without depending on their boss or the government truly terrifies you.