Insight to Action

​Don't Make Me Turn This Car Around! Why a Repeal of the Cadillac Tax Might Not Matter

11 January 2016

In a remarkable act of bipartisanship, the Cadillac tax was delayed by two years as part of the last omnibus budget bill. Among "normal" folks, this was just some lovely news, but among policy wonks and healthcare consultants, it was cause for a rash of "pro" and "con" articles. Employers hate it! Unions hate it! Economists love it!

But how could anyone "love" a tax??

It helps to ask why we have this tax in the first place, and it’s important to understand that this tax is not a primary source of revenue funding the overall ACA mandates.

The Cadillac tax by itself is NOT an essential part of the long-term reform plan—but lowering healthcare costs is, and the Cadillac tax is supposed to lower healthcare costs. Economists continue to argue that for this particular problem, tax incentives and dis-incentives are the most effective way to control spending without direct government intervention, such as instituting actual price controls.

Losing the Cadillac tax also won’t break the bank. In the CBO’s March 2015 update to the budget, Cadillac tax revenue was already predicted to be reduced by more than HALF the original estimate. This likely made the conversation for delay or repeal a lot more palatable. With that downsized revenue—compared to other revenue sources, such as insurance taxes, anticipated changes in employment and wages (and the resulting increased revenue from FICA and decreased spending on Social Security payments), and penalties paid by the uninsured and by corporations—the Cadillac tax was only about 17% of the estimated revenue total between 2016-2025.

In other words, that two-year delay didn’t cost much, and a total repeal could likely be paid for through other means. If the government can develop compromise solutions to address the true cost of healthcare, the Cadillac tax can be relegated to the dustbin of history, forever to be remembered as their version of mom and dad's admonishment: "Don't make me turn this car around!"

Now they have two more years to come up with ideas for cost control.