A mix of business groups and labor unions are pushing to tee up the next big Obamacare fight: killing its so-called Cadillac tax.

It is, they say, the type of Obamacare “fix” that Republicans and Democrats can agree on — notwithstanding the problem of filling an $87 billion budget hole that nixing the levy would produce.

Many expect it to be the next protracted battle over Obamacare — one that threatens to become a headache for Democrats, many of whom never liked the tax despite supporting the law more generally.
It’s one of the last big parts of the Affordable Care Act to go into effect — lawmakers delayed the levy until 2018 in part because it is so controversial — but companies are wrestling with it now as they plan employee benefits. Some are already negotiating with unions over benefits that could spill into 2018.

“This is going to have a life of its own as the clock ticks closer to 2018,” said Rep. Joe Courtney (D-Conn.), a critic of the tax.

Though the nickname suggests it will apply to a select few, experts say a majority of employers could eventually face the prospect of imposing what will be the first-ever tax on health care benefits.

The IRS began last month spelling out the nitty-gritty of how exactly the tax will work, though it left out many of the details employers say they need.

At issue is a 40 percent excise tax on the health benefits companies provide their workers above a certain threshold. In 2018, the tax will hit insurance and related perks valued at more than $10,200 for singles and $27,500 for families. So for family benefits worth $30,000, the tax would apply to the $2,500 that’s above the limit.

Taxing those benefits represents a major shift in generations-old tax policy.

The government has encouraged companies to offer health insurance by letting them write off from their taxes the cost of providing workers with coverage for more than a half-century, a byproduct of World War II-era wage controls.

Eager to attract workers and unable to increase pay, companies turned to expanding fringe benefits such as health insurance. But economists of all stripes have long complained the open-ended tax break companies get for providing that coverage drives up health care costs while disproportionately benefiting the affluent.

Nonetheless, it’s a major reason why millions of Americans get coverage through their jobs. So for lawmakers, it’s long been all-but-politically untouchable. Ironically, Barack Obama as a presidential candidate attacked Sen. John McCain in 2008 for proposing to tax health benefits.

Unions, which often have generous health benefits and have opposed the tax since the law’s inception, say the looming levy is already becoming a factor in their contract negotiations.

“Employers are coming to the table asking for cuts in benefits based on their preliminary projections around the tax,” said Shaun O’Brien, assistant policy director for health and retirement at the AFL-CIO, which backs repeal.

The National Education Association, which is also demanding the tax be rescinded, issued a report Thursday complaining it would disproportionately hit women and older workers.

“We continue to support the Affordable Care Act,” said Kim Anderson, senior director of the group’s Center for Advocacy and Outreach. But “the excise tax on high-cost plans can randomly and unfairly cause hardship to American workers and their families” and “Congress must repeal the excise tax.”
The administration has long argued it is a modest step to get health care costs under control. It “will affect only a small portion of the very highest-cost health plans — a total of 3 percent of premiums in 2013,” Obama economic adviser Jason Furman wrote in a 2009 White House blog post.

The threshold at which the tax kicks in is higher than current average premium rates, according to the nonpartisan Kaiser Family Foundation. The typical family plan cost $16,834 last year, according to Kaiser, while the average individual plan cost $6,025.

But the tax is more onerous than it appears, experts say, in part because it hits more than just traditional health insurance.

It also applies to health savings and flexible spending accounts, including money workers now sock away tax-free for medical expenses. Supplemental insurance plans will also be included and, potentially, on-site clinics companies set up for their workers, the IRS said last month.

What’s more, even if a company ducks the tax in 2018 — and many have been trying to wring savings out of their plans in anticipation of the new rules — they may only get a temporary reprieve.

That’s because Congress pegged the tax threshold to a relatively slow measure of inflation.

It’s linked to the consumer price index plus 1 percent, even though medical costs typically grow much faster. Private health care spending per enrollee will grow by an average of 5.6 percent annually over the next decade, according to the Congressional Budget Office, while inflation will increase by 2 percent per year.

That means the tax will ensnare more companies over time, with some likening it to the alternative minimum tax, originally aimed at the very wealthy but which trickled to those further down the income ladder.

About one-third of employers will be hit by the tax in 2018 if they do nothing to change their plans, according to a March survey by Mercer, a benefits consulting firm. By 2022, almost 60 percent will be facing the levy.

“‘Cadillac tax’ is really a misnomer,” said Beth Umland, Mercer’s director of research for health and benefits. “Potentially any employer could be hit by this tax.”

Former Obamacare adviser Jonathan Gruber, in one of the now-infamous videos that emerged late last year, said rising medical costs ensure the Cadillac tax will eventually all but eliminate the break companies get for providing health insurance.

Economists in both parties have been pushing the idea for decades as a way to slow health care costs, because it amounts to a cap on benefits.

That’s a good thing, many say, because overly generous insurance shields beneficiaries from costs, which encourages them to use more services, driving up prices for everyone else. It’s also a matter of fairness, some say, because forgoing taxes on health care benefits amounts to a major break for those with jobs offering coverage.

“Capping the tax benefit for employer-sponsored health insurance, I think, is a great idea,” said Len Burman, head of the nonpartisan Tax Policy Center. “Providing an open-ended subsidy for health insurance, which encourages people to get plans that do less to restrain spending, contributes to rising health care costs. Most economists who’ve looked at health care spending have concluded that.”

The tax could eventually hit all health plans, “although you probably wouldn’t get policymakers to admit to that,” Burman siad. He added he doubts Congress will allow that to happen, saying lawmakers will come under substantial pressure to ease the tax.

It’s a big reason why Congress’ independent budget scorekeepers have said Obamacare won’t add to the deficit, and why the tax will be tough to repeal. The levy, which is projected to generate $87 billion over a decade, ramps up slowly, but is estimated to eventually produce so much money that it alone will cover the cost of providing insurance subsidies through the program’s exchanges.

“This provision is one of several in the ACA designed to promote fiscal responsibility and slow the growth of health care costs,” said White House spokeswoman Jessica Santillo.

But as the tax begins to loom larger, the criticism is getting louder.

Some say it will punish companies that have been trying to rein in costs.

Businesses have been pushing their workers out of high-cost plans and into ones with bigger deductibles while simultaneously offering them health savings accounts to help them cope with the increased costs. That may be for naught, because both would be subject to the levy.

“If employees participate in HSAs and FSAs through payroll deductions, which employers have been encouraging them to do — now it’s going to hurt the employers,” said Rick Grafmeyer, a tax lobbyist and former Republican tax aide. “So now they’re putting the employers in the position of having to say, ‘No, no, no, we don’t want you to participate as much in these things because it will likely cause us to pay the Cadillac tax.’ It’s crazy.”

Others complain the tax discriminates against those in the Northeast and West Coast, because health costs tend to be higher there than in the South or Midwest.

“You could have parts of the country where [they] have the most lavish coverage and not be subject to the tax,” while in other areas “people will get hammered and forced into some pretty bad choices,” said Courtney, the Connecticut lawmaker.

Republicans grouse about parts in the law providing higher thresholds for when the tax kicks in for those in high-risk professions, such as law enforcement and fire-fighting, which they call a sop to unions.
Last month, Rep. Frank Guinta (R-N.H.) introduced legislation to cancel the tax.

“It’s going to undermine the employer-sponsored system, and it’s going to do the exact opposite of what anyone’s vision of health reform would have done, which is to provide greater access to health care coverage,” said Katie Mahoney, director of health care policy at the U.S. Chamber of Commerce. “This is something that we are really trying to educate folks about.”

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