ObamaCare’s Cadillac Tax is a 40% excise tax on high end plans above $10,200 for individuals and $27,500 for family coverage starting in 2018. This tax is not deductible. The excise tax is one of the main revenue sources for the ACA, helps curb healthcare costs, and is also one of the bigger deterrents of income inequality in healthcare.

Cadillac. As in if you want that high-end, luxury, gold-plated one that no one else on the block can afford, you’ll be paying more for it.

Who Pays ObamaCare’s Excise Tax?

The Cadillac tax isn’t paid by individuals directly, instead health insurance issuers and sponsors of self-funded group health plans pay the tax. However, an excise tax in general typically results in that cost being passed on (at least in part) to the consumer.

How Much is the ObamaCare’s Excise Tax?

The Cadillac tax is 40% of any dollar amount beyond the caps that is considered “excess” health spending. So it’s 40% on every dollar over $10,200 for individuals and $27,500 for family in 2018. It is not just a flat 40% increase on the total dollar amount.

Why Is There a Tax on High End Health Plans?

The Cadillac tax on high end health plans is meant to slow the growth of healthcare costs (by discouraging unequal health coverage and the over-use of care) and to generate revenue for ACA spending.

In America we have inequality due to income. Not being able to afford the 60 inch TV your neighbor has is annoying. Not being able to afford the platinum health plan your neighbor has, means that they will get better treatment and better access to healthcare than you.

High-end plans may drive up the price of care in your region by paying higher rates, or drive down the availability of quality care by overusing services. High-end health plans that cover “everything” at little-or-no out-of-pocket costs actually encourage the overuse of care like unnecessary tests and hospital visits. The overuse of care, and more-over the lack of “shopping around” for good priced care, raises US health costs overall.

Our tiered healthcare system, which gives better care to those who can pay more, and the bare minimums to those who can’t, is inherently unfair. The Cadillac Tax seeks to disincentive the disparity between low-end and high-end health plans through taxation. It also ensures that those who can afford the best health plans contribute tax dollars to healthcare. The extra tax revenue from high end plans helps to subsidize cost assistance for lower end plans.

What is an Excise Tax?

An excise tax is an indirect tax. It is a tax on the producer or seller (insurer or group in this instance) who is expected to try to recover or shift the tax by raising the price paid by the buyer. Excises are typically imposed in addition to other indirect taxes. These taxes are typically on things like: gasoline and other fuels, other environmental taxes, taxes on tobacco, alcohol, gambling, etc.

Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product. There are also excise taxes on activities, such as on wagering or on highway usage by trucks. Excise Tax has several general excise tax programs. One of the major components of the excise program is motor fuel.  -IRS

Who Does the Cadillac Tax Affect?

  • The Cadillac tax affects those with high end plans directly, by either costing them more money or pricing them out of high end plans.
  • The Cadillac tax affects those with jobs that offer high end plans and their employers. So whether it’s Unions, who bargained for high end plans for employees, Koch industry executives with amazing benefits, or your rich uncle who always gets the best plan for him and his family while the rest of the family uses Medicaid, anyone with a high end plan gets hit with the non-deductible tax.
  • The Cadillac tax also affects the rest of the country, as it is estimated to bring $80 billion in revenue between 2018 and 2023. This is part of what pays for the spending in the Affordable Care Act. So indirectly it’s paying to subsidize ACA subsidies, Medicaid, Medicare, etc.
  • It potentially affects the whole cost of healthcare in the US. When consumers must pay a share of the costs, they will be less likely to overuse care. The overuse of care drives up healthcare costs for everyone.

Cadillac Tax Pros and Cons

Those against the tax say that it won’t help curb costs, and rather just adds extra costs as employers either offer the same plans with greater costs to the employee. It also adds extra costs to those with serious health problems who choose a high-end plan due to care being unaffordable any other way.

Those for the tax say that it will help curb costs and will deter plan inequality which is contributing to the growth in healthcare spending in a number of ways.

The Cadillac tax is designed to fund the PPACA and to deter inequality in health plans. However, those with deep pockets will simply pay the 40% (or whatever tax). So in practice it may leave this 1%-ish of super platinum health plans (that are more tax advantaged for employers than offering bigger paychecks) than ensure everyone else gets lower cost plans.

That being said, insurers offer plans for more than just your health, they offer them for money. If they design plans that cost more than $10,200 for individuals and $27,500 for family coverage (for 2018 at least) that means they can be darn sure their plan won’t sell to 99% of consumers. Thus, insurers are also incentivized to keep plans in a more affordable range, deterring them from pricing folks out of affordable health insurance. Combined with new minimum benefits this helps to regulate what insurers can charge in premiums.

We can expect some very solid plans, just under the threshold, that carry most of the benefits of current high-end plans, but encourage that little bit of extra shopping around that will help to bring down over-all healthcare costs. This would help balance the revenue needed from the tax itself, as spending is primarily on subsidizing the cost of premiums which are a reflection of the cost of care.

ACA Revenue and The Importance of the Cadillac Tax

According to the CBO in March 2015 the excise tax is the third largest single source of revenue in the ACA. In fact the Cadillac tax alone equals 1/2 of total estimated revenue of employer penalty payments. And this is under current estimates, as of January 2015 the excise tax was projected to account for just 20 billion less than the employer penalty. Considering There are only two other major revenue sources “the individual penalty” and “Other / mainly the effects of changes in taxable compensation on revenues”, this is a big deal.

Essentially it means that if the Cadillac tax is repealed, the ACA needs to do some backflips to

Janurary 2015: Cadillac Tax = 149 billion in revenue 2016 – 2025 | Employer penalty = 169 billion

March 2015: Cadillac Tax = 87 billion in revenue 2016 – 2025 | Employer penalt y= 167 billion

Compare March 2015: Total ACA spending = 1,707 billion | Total Revenue = 500 billion | Individual mandate = 43 billion | Other = 202 billion

Why did the estimate drop so much? CBO and JCT now estimate that federal revenues stemming from the excise tax on certain high-premium insurance plans will be $62 billion (or 41 percent) lower over the 2016–2025 period than was estimated previously. Because premiums are now projected to be lower, fewer workers are expected to be enrolled in employment-based insurance plans whose costs exceed the excise tax thresholds specified in the ACA.

Ok, so it is a good thing then? Well the point of the excise tax, we assume, was two fold. A) Generate revenue and/or B) Deter higher end plans to deter income inequality from determining access to quality health insurance and curb costs over time. So we can say, if B is true, then we will need less revenue as we should see a curb in premium costs and healthcare costs. However if only A is true and B isn’t, then the inevitable rising costs will mean more spending and less revenue.

Will the Cadillac Tax Get Repealed?

You’ll notice this tax was put off until 2018. That was no mistake. If you have a lobbyist in Washington, then there is a good chance you offer high end health plans to at least some of your employees. So support for this tax is lacking on all sides of the isle. Still, someone (Gruber?!?!) stuck it in the law. You can expect to see this tax go out the window if we get a Republican President in 2016, but you may see it stick around if we get the right type of Democrat.

Not every tax is attractive, but at the end of the day, the excise tax could really make a lot of sense. Hopefully we will get a chance to see it in action before it gets it’s “day-of-judgment”

Anyway, for the time being the IRS has released some updated rulings on how the tax will work. Those who think the tax could be tweaked to be more effective should write a letter to the IRS and let them know how they can make the tax work smarter for more Americans.

Section 4980I — Excise Tax on High Cost Employer-Sponsored Health Coverage

Learn more about the Cadillac Tax from healthaffairs.org