Will the Cadillac Tax Generate Revenue?

11 Pages Posted: 8 May 2019

See all articles by Paul Fronstin

Paul Fronstin

Employee Benefit Research Institute (EBRI)

Date Written: January 31, 2019

Abstract

When the ACA passed in 2010, the Cadillac tax, a nondeductible 40 percent excise tax imposed on the portion of health coverage costs that exceeds $10,200 for single coverage and $27,500 for family coverage, was scheduled to take effect in 2018. It has since been delayed twice and is currently scheduled to take effect in 2022. At that point, the portion of health coverage costs that exceeds $11,200 for single coverage and $30,150 for family coverage will be subject to the tax.

The Cadillac tax is controversial. It is the first time that the historically unlimited tax exclusion for employment-based health benefits has been impacted. Although it has its enthusiasts, there has been bipartisan support for repealing it.

In May 2018, the Congressional Budget Office (CBO) estimated that the tax would generate $168 billion in tax revenue from 2022 to 2028. The Joint Tax Committee (JCT) and CBO assume that when employers reduce the comprehensiveness of health benefits to avoid the tax that they will in turn increase worker taxable wages such that total compensation is unchanged. Shifting the composition of compensation toward a higher proportion of taxable wages will translate into additional tax revenue. Repealing the tax would mean finding $168 billion (or the equivalent in today’s dollars) in new tax revenue.

Why is understanding the wage-benefit tradeoff so important? Research on the tradeoff has focused almost exclusively on what happens to worker wages when the cost of health insurance increases. The literature on the wage-benefit tradeoff is being used in such a way that it assumes that wage responses to health insurance cuts and health insurance cost increases are symmetric. Only one study on the wage-benefit tradeoff has been found that examines what happens to worker wages when the cost of health insurance decreases, as would be the case with the Cadillac tax. It examined the impact of community rating in New York State on the wages of older workers in small firms, firms that would see premium reductions as a result of community rating, and found that older workers in small firms saw their wages increase relative to workers in large firms and workers in other states. However, it is possible that wages do not respond symmetrically to increases and decreases in the cost of employment-based health insurance. There is evidence of asymmetric effects in other aspects of health care, labor markets, and elsewhere that could inform the economic theory on wage-benefit tradeoffs.

Even if workers’ taxable wages do not increase as a result of employers reducing the comprehensiveness of health benefits, the added tax revenue may still be realized. If employers kept the savings and those savings became corporate profits, they might become partially taxable as dividends and increased capital gains, thus producing higher federal tax revenue. If employers use the savings to purchase capital equipment, the seller of that equipment would see higher sales, which would result in federal tax revenue through a combination of profits, higher worker wages from sales bonuses, and worker wages possibly associated with the cost of installing the equipment. If employers used the savings to grow the business and hire additional workers, those workers would be paid wages that were taxable.

Suggested Citation

Fronstin, Paul, Will the Cadillac Tax Generate Revenue? (January 31, 2019). Available at SSRN: https://ssrn.com/abstract=3373193 or http://dx.doi.org/10.2139/ssrn.3373193

Paul Fronstin (Contact Author)

Employee Benefit Research Institute (EBRI) ( email )

1100 13th Street, NW
Suite 878
Washington, DC 20005-4204
United States
202-775-6352 (Phone)
202-775-6312 (Fax)

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