The House of Representatives is poised to vote to repeal the “Cadillac tax” on high-cost employer health insurance, removing a piece of the Affordable Care Act that never took effect.
Wednesday’s scheduled vote could deliver a victory to labor unions and employers that teamed up against the tax. On the losing side: deficit hawks and health economists who worry about distortions caused by favorable tax treatment of employer-sponsored insurance.
The tax is a 40% levy on health insurance above certain thresholds—about $11,200 for individuals and $30,100 for families, starting in 2022. It counters the tax law that says employees must pay individual income taxes on wages but not on the value of their health policies.
The House is using expedited procedures that waive rules requiring offsets for tax cuts while imposing a two-thirds majority hurdle. More than 80% of House members co-sponsor the bill, making it very likely to pass though it faces an uncertain fate in the Senate, where a companion bill has bipartisan support.
“This seems to be a more serious threat than we’ve had before,” said Paul Van de Water, a senior fellow at the left-leaning Center on Budget and Policy Priorities, who supports the tax.
At first glance, it seems odd for House Democrats to pass a roughly $200 billion tax cut that removes an ACA plank. It is a tax cut without the revenue-raising offsets Democrats say they favor, and it is a strike against Obamacare while Democrats defend the law.
But the Cadillac tax has always been different. Many House Democrats opposed it as the ACA was written. They won concessions to scale it back and then helped delay it so it didn’t start as scheduled in 2018.
“I’ve been working on this since it first popped its head up,” said Rep. Joe Courtney (D., Conn.), the bill’s sponsor. “The most noticeable change in the environment is just the extraordinary outpouring of support for repealing the tax from a much more diverse group of people.”
Repeal backers include the American Federation of Teachers, General Motors Co., the International Union of Operating Engineers and insurer Cigna Corp, according to a letter from a group supporting repeal.
Because wages are taxed and health plans aren’t, that distorts choices by employers and workers, economists say. That gap contributed to decisions by unions to negotiate for benefits in lieu of wage hikes.
“They thought that only the top—the head, the big execs—got these lucrative plans,” Rep. Mike Kelly (R., Pa.) said of the Democrats who created the tax. “We’re talking about everyday people who are on the line, busting their rear end. And I thought, to me, what a punch in the gut to these guys.”
The Cadillac tax would force changes or penalize some existing plans, and its supporters argue that it would help curb the growth of health costs. They also say employers would raise wages once there is a smaller difference between paying wages or insurance.
“If this is repealed and we don’t cap the [tax] exclusion or do something else, then we’re back pretty much to the unlimited tax preference for health coverage,” Mr. Van de Water said.
Mr. Courtney said the tax merely encourages companies to increase deductibles. Repeal, he said, isn’t undermining the ACA.
The Senate bill has more than 40 co-sponsors, including Democratic presidential candidates Kamala Harris of California and Elizabeth Warren of Massachusetts.
Senate Majority Leader Mitch McConnell (R., Ky.) isn’t moving much legislation, focusing instead on confirming judges. Chuck Grassley (R., Iowa), the Finance Committee chairman, is open to considering repeal but is focused on lapsed tax breaks and those expiring this year, said spokesman Michael Zona.
Businesses have said they have already trimmed health plans to minimize the looming effect of the tax. Among firms offering health benefits, 7% of small firms and 26% of large firms said they considered the potential impact when making benefit decisions for 2018, according to the Kaiser Family Foundation.
About 21% of employers would face the tax in 2022 because they have at least one plan that exceeds the threshold, according to their analysis. Because of the way the thresholds are indexed to inflation, the tax’s reach climbs rapidly, hitting 46% of employers in 2030.
More employers are offering high-deductible plans because preferred provider organizations, or PPOs, are subject to the tax, said Chatrane Birbal, director of policy engagement with the Society for Human Resource Management, a membership association. There is then a higher out-of-pocket cost for employees.
“Some employees with health-care conditions may opt to no longer have employer coverage, or they may view it as employers just looking to cut costs,” said Ms. Birbal.
Some companies have limited the amount that workers can put in flexible spending accounts for certain out-of-pocket medical expenses. The tax threshold takes into account the value of premiums and those other benefits.
Some experts say much of the tax’s effect has waned but could pick up as 2022 nears if there is a risk the tax might actually happen.
If Congress kills the Cadillac tax, Obamacare’s levies on medical device makers and health insurers could be next.
“We have continual near-death experiences with the medical device tax,” Mr. Van de Water said. “The device manufacturers are going to come back once more and say, what about us?”