Apr 06, 2015 - 4:30pm

How Jonathan Gruber's Ghost Haunts Obamacare's ‘Cadillac Tax’ on Health Benefits


Senior Editor, Digital Content

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MIT Professor Jonathan Gruber speaks during a House Oversight Committee.
MIT Professor Jonathan Gruber speaks during a House Oversight Committee. Photo credit: Andrew Harrer/Bloomberg.

One of the biggest Obamacare taxes won’t take effect until 2018, but all sorts of people are organizing to stop it. It involves the “Cadillac Tax,” an excise tax on health insurance benefits employers offer their employees:

At issue is a 40 percent excise tax on the health benefits companies provide their workers above a certain threshold. In 2018, the tax will hit insurance and related perks valued at more than $10,200 for singles and $27,500 for families. So for family benefits worth $30,000, the tax would apply to the $2,500 that’s above the limit.

But the tax is more onerous than it appears, experts say, in part because it hits more than just traditional health insurance.

It also applies to health savings and flexible spending accounts, including money workers now sock away tax-free for medical expenses. Supplemental insurance plans will also be included and, potentially, on-site clinics companies set up for their workers, the IRS said last month.

Both the AFL-CIO and the U.S. Chamber oppose the tax. Even groups that support the health care law want the tax to go away:

“We continue to support the Affordable Care Act,” said Kim Anderson, senior director of the [National Education Association's] Center for Advocacy and Outreach. But “the excise tax on high-cost plans can randomly and unfairly cause hardship to American workers and their families” and “Congress must repeal the excise tax.”

One survey found 80% of employers want the tax repealed.

While the tax’s “Cadillac” label implies it will only affect high-income workers, a few moments of honesty from one of the White House’s top advisers on the health care law caught on video, show it was designed to be more far-reaching.

In 2012, the MIT economist Jonathan Gruber admitted to a University of Rhode Island audience, “Over time [the excise tax] is gonna apply to more and more health-insurance plans.” 

This is because, as the Politico story explains, the tax’s reach will expand dramatically:

It’s linked to the consumer price index plus 1 percent, even though medical costs typically grow much faster. Private health care spending per enrollee will grow by an average of 5.6 percent annually over the next decade, according to the Congressional Budget Office, while inflation will increase by 2 percent per year.

That means the tax will ensnare more companies over time, with some likening it to the alternative minimum tax, originally aimed at the very wealthy but which trickled to those further down the income ladder.

Gruber is right. A survey by health benefits consulting firm Mercer found that while just under one-third of all employers will be at risk of paying the tax in 2018, that share will escalate to almost 60% in 2022

While Gruber once said the tax was “one of the most important and bravest parts of the health care law," employers disagree. They consider it an anathema, because they offer health insurance benefits to attract workers. The tax will mean massive disruptions for them and the employees covered by these plans:

“It’s going to undermine the employer-sponsored system, and it’s going to do the exact opposite of what anyone’s vision of health reform would have done, which is to provide greater access to health care coverage,” said Katie Mahoney, director of health care policy at the U.S. Chamber of Commerce. “This is something that we are really trying to educate folks about.”

If you thought the public got upset over the launch of the Healthcare.gov, wait until you see the harsh reaction when their health benefits are taxed away. 

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About the Author

About the Author

Sean Hackbarth
Senior Editor, Digital Content

Sean writes about public policies affecting businesses including energy, health care, and regulations. When not battling those making it harder for free enterprise to succeed, he raves about all things Wisconsin (his home state) and religiously follows the Green Bay Packers.