The Case Against A Health Insurance Excise Tax

Lawmakers in Washington are close to a consensus view that the Senate’s excise tax on higher-cost health plans is a good idea. Here’s the problem: The consensus is wrong. The misnamed “Cadillac tax” is unfair and unwise.

While it’s been couched in other terms – “bending the cost curve,” etc. – this is a tax on middle-class Americans, pure and simple. The cost reduction effects are highly theoretical, but the pocketbook effect is immediate and real.

Here are some key arguments against this tax:

  • It’s based on flawed logic: Adherents would have you believe that the excise tax will change the way people use medical services – for the better. But the Association of Federal Health Organizations in November found that such an excise tax would raise costs for basic coverage and limit choices for millions of consumers; its impact goes far beyond “luxury” services or “unnecessary” care.
  • It’s a tax on middle-class Americans: They call it a “Cadillac tax” because it was originally pitched as a way to make wealthy executives pay for their luxury plans. But this tax will hit middle-class families the hardest, adding thousands of dollars a year to family insurance premiums. And, because health plan costs are rising much faster than the tax’s inflation index, it will hurt an increasing number of middle-class families every year.
  • It’s anti-union: Many American unions traded real wages and other forms of income in order to ensure that their members got decent health coverage. Taxing those benefits will provide employers with an excuse to break their promises and cut these benefits, while giving nothing back in return.
  • It’s bad politics: This tax is likely to hurt politicians who support it, and hurt Democrats’ chances in 2010. This is true nationwide, and especially in some states and regions where it can least afford to alienate core constituencies.
  • It could promote bias in hiring: Health plans become costly for a variety of reasons. Benefit design, the target of the tax, is only one reason. This tax does little to distinguish cost drivers – like geographical variations in health costs, an aging workforce and other demographic factors – and could make employers reluctant to hire certain workers.
  • Campaign promises are being broken: A number of candidates in last year’s elections, including the President, promised voters that health reform would not result in new taxes for the middle class. They also promised voters that “if you like the plan you have now, you can keep it.” This tax not only breaks the first promise, but also the second. Employers will cut current health plans in order to avoid this tax.
  • It will effect one in every five employer plans: The excise tax could hit up to 19 percent of medical packages offered by employers in 2013, the first year it goes into effect. Even federal workers are not spared. Report findings indicate that single enrollees would be hit by a tax surcharge (or benefit cut) in the first year of the tax, and that their average cost over ten years would be $1,600 per year. Family plans were projected to face a $5,500 annual tax per year by 2022.