The tax treatment of employer-sponsored health insurance under Obamacare is one of the few provisions of the law that Congress has touched since passage. It’s also clear that members on both sides of the aisle think the topic needs more work.
“The employer-sponsored health insurance market is a vital one. The question we must wrestle with is how we can sustain this option while advancing reforms that make the tax code fairer and health care more affordable for all Americans,” said House Ways and Means Committee Chairman Kevin Brady (R-Texas) at a hearing Thursday. “We need bold solutions to tackle this challenge, not Obamacare’s punitive tax on high cost health insurance plans that the law itself has made even more expensive.”
He was referring to the so-called Cadillac tax, a 40 percent excise tax on employer-provided health benefits above a certain threshold. It was originally supposed to go into effect in 2018. However, a coalition of diverse interest groups successfully lobbied against the tax last year, and Congress then delayed its implementation for two years.
Employees pay for their premiums under employer-provided health insurance with “pre-tax dollars,” which leads to about 30 percent savings for the typical worker. There are several critiques of this system. First, it’s very expensive for the federal government. By excluding premiums from federal income and payroll taxes, the government will lose more than $250 billion in fiscal year 2016, according to the Congressional Budget Office. The employer exclusion also contributes to a shift in compensation from taxable wages to nontaxable health benefits.
The employer exclusion also keeps consumers from realizing the true cost of health care, its opponents say. It is also unfair, as people who buy their health insurance individually don’t get the same tax subsidy as people who get insurance through their employer.
“The best way to expand health insurance choices for individuals is to truly equalize the treatment of employer purchased and individually purchased coverage,” said Avik Roy, a senior fellow at the Manhattan Institute and a witness at the hearing.
The Cadillac tax was supposed to help with that problem by encouraging employers to select reasonably priced health plans. It’s hard to know if that’s happened because of its delay in implementation.
But delaying the tax doesn’t address the fundamental concerns with it. Members from both parties have introduced bills repealing the Cadillac tax, but some Democrats have been adamant that if it is repealed, it must also be replaced. It’s estimated that fully repealing the tax would cost some $90 billion in just the first 10 years.
While the issue is politically tricky for both parties, it’s especially tough for Republicans. Conservatives have long supported a health policy idea similar to the Cadillac tax that caps tax breaks for benefits at certain levels. But it goes against their political messaging about the abhorrence of Obamacare to voice support for the basic idea of the Cadillac tax or call for smaller reforms.
At Thursday’s hearing, ranking member Sander Levin was quick to point out that Republicans do not have a concrete alternative to Obamacare’s way of evening out employer-sponsored plans and individual plans.
“You’ve been handcuffed because you just talk out both sides of your mouth constantly. Listening to the two of you, I don’t know what your plan would ever be,” the Michigan Democrat said, addressing the two conservative witnesses on the panel. “You say keep the exclusion, but cap it. You say come up with credits, but you don’t say how much. … You’re going to destroy the basis on which we’ve built.”