We Can’t Turn Back on Obamacare’s Turning Point

Blog Post
Monday, October 12, 2015

There has recently been a renewed focus on a key provision in the Affordable Care Act (ACA) -- the so-called “Cadillac tax.” The tax, which will take effect in 2018, attempts to limit the tax-free treatment of employer-provided health insurance benefits by taxing them above a certain amount.

The “Cadillac” terminology arises because only the most expensive, generous insurance plans are initially projected to be hit by the tax. As insurance costs rise along with health care costs, more plans will gradually become partly subject to the tax, and thus the amount of fully tax-free health insurance in the country will fall.

This is good, because the exclusion of health insurance from taxation is widely considered economically inefficient and regressive tax policy. It is very expensive for the government, only provides benefits to some workers, distributes those benefits primarily to those who earn the highest incomes, and encourages higher health care spending. Economists believe that as the tax-based preference for health insurance over employee wages dissipates, employee wages will rise.

The Cadillac tax was always a suboptimal and clunky method through which to limit the health care tax exclusion because it does so indirectly (Concord’s take at the time). However, when the ACA was created, the Caddy tax worked politically because it sounded more like a tax on insurance companies rather than a limit on workers’ fringe benefits. And more importantly, the Congressional Budget Office (CBO) scored it as contributing to the 10-year deficit reduction from the ACA and as helping to bend the curve on rising health care costs over the long term.

Understanding that history is important as supporters gear up to defend the tax against threats of repeal from congressional members and presidential candidates in both parties.

When I (and I suspect many other health care wonks) think back to the turning point for Obamacare’s passage, it was the creation of the Cadillac tax. That made the Senate’s approval of the ACA possible.

The period of July-August 2009 was as important inside-the-beltway for the Senate Finance Committee’s piecing together of a few key legislative proposals into what we now call the ACA as it was outside-the-beltway in the rise of popular opposition to health care reform.

It began with a Senate Budget Committee hearing on July 16. There was a pretty bold and probably orchestrated dialogue between Chairman Kent Conrad and Congressional Budget Office (CBO) Director Doug Elmendorf. (Here is my blog post from that day. For a more detailed look at these events, see Philip Joyce’s great book about the history of the CBO).

The CBO was about to release its analysis of the already-written House health care reform bill while the Senate Finance Committee (of which Conrad was also a member) was still putting together its bill. Conrad asked Elmendorf whether any of the current health care reform bills worked to “bend the curve” of long-term health care costs.

Elmendorf’s answer: “No, Mr. Chairman. In the legislation that has been reported, we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of Federal health spending by a significant amount.”

The back-and-forth set off a firestorm. (Well, maybe only in the budget world and in the House of Representatives!) But more importantly for this story, it directly led the Senate Finance Committee to add the Cadillac tax to its health reform bill in August. That’s because addressing the tax treatment of health insurance was the main policy recommendation from CBO as to what Congress could add to reform legislation that the budget office would score as “bending the curve” of long-term health care costs.

Last week, The Hamilton Project at Brookings held an event that saw Jason Furman, the current chairman of the Council of Economic Advisors, speak forcefully in support of the tax. Backing him up with support was Peter Orszag, who as President Obama’s first director of the Office of Management and Budget was the administration’s top salesperson for the bill’s cost controls. Earlier Orszag, as CBO director, had basically created the analytical capacity that office used to score the ACA.

Both Furman and Orszag know how important the Cadillac tax was in the ACA’s creation, how hard a fight it was to get it into the legislation, and how crucial it is for maintaining the ACA’s cost-control legacy in both the policy debate and in the projections for the fiscal future. While we are still on an unsustainable path, the CBO’s post-ACA projections for health care costs are lower than prior to passage, a part of which can be attributed to the tax.

As Orszag admitted, there are good-faith arguments against the Cadillac tax and numerous proposals to improve it. He spoke in favor of one proposal that was presented at the conference that would scrap the tax exclusion and replace it with a tax credit for the purchase of health insurance that would be available more broadly.

However, those currently aligning against the Cadillac tax are not offering such proposals. To credibly argue against the tax they need to not just say they will pay for repeal’s effect on increasing the deficit, they should propose something that reduces the growth in health care costs over the long term.

Reversing the hard choices made at the time is easier and maybe even politically rewarding in the short term. Concord warned at the time that one of the biggest fiscal risks posed by the ACA was the political temptation to keep its popular pieces and get rid of the less popular cost controls like the Cadillac tax. The insurance expansion and insurance market reforms have been a success. Any politician who claims to support those successes or who worries about the nation’s long-term fiscal challenges has no business calling for a simple Cadillac tax repeal.

Letter from 101 economists to the Congressional leadership in support of the Caddy Tax