The Affordable Care Act will impose a 40 percent excise tax on employer-sponsored health coverage that costs more than $10,200 for single and $27,500 for family coverage. This "Cadillac tax" will also hit cost-control measures that have become increasingly popular with employers and employees alike: flexible spending arrangements, health savings accounts, and on-site employer health clinics.
Private employers might be able to avoid the tax by unilaterally reducing employee health benefits. But state and local governments, which have negotiated robust benefits in lieu of higher wages, are facing a fiscal tsunami.
Though recent congressional action has the tax on course to start in 2020 instead of 2018, that is woefully insufficient. A permanent reform is needed.
At a 6.5 percent annual inflation rate for health insurance premiums, the Cadillac tax alone would have added at least 12 percent to the cost of health coverage for the average Southeastern Pennsylvania municipality in 2018. And that burden will grow over time because the "excess benefit" thresholds rise with the Consumer Price Index and ignores regional differences in benefit costs. This "one size fits all" approach means that an HMO in Pennsylvania - which costs 10 percent to 15 percent more than one outside the Northeast - will be taxed like a Cadillac even though it's just a nicely appointed Chevy Malibu.
It was also recently reported that the Cadillac tax could cost the Pennsylvania Retired Employee Health Program an additional $100 million. If anything, that amount understates the liability for the commonwealth because it does not include the cost of active state employee benefits or those for retired state troopers and their families. New Jersey's public employee health plans will pay an additional $261 million in 2018. While no hard estimates are available for Philadelphia, New York City pegs its 2018 tax bill at $22 million.
The Congressional Budget Office projects that 75 percent of Cadillac tax revenues will come from increased individual income and payroll taxes - assuming that employers will increase taxable wages in exchange for decreased nontaxable health benefits. Trading benefits for wages seems straightforward, but it's a fool's errand. A benefits-to-wages conversion could be disastrous for municipalities with severely distressed pension plans like Philadelphia, which already has more than $5 billion in unfunded pension liability. There simply is not enough juice left in the taxpayer orange to do this.
Unsurprisingly, the Cadillac tax has roiled municipal collective bargaining negotiations. With mandatory arbitration for police and fire personnel, Pennsylvania municipalities will likely be forced to fund health benefits they can barely afford, and then pay a 40 percent excise tax on the resulting "excess benefits." This burden will be most acute for Philadelphia and other municipalities with union contracts requiring costly post-retirement health benefits. Confronted by ever-rising health-benefit costs, as well as a huge Cadillac tax, state and local tax increases are all but inevitable.
The Alliance to Fight the 40, a bipartisan coalition of employers, labor unions, and insurers, has launched an effort to repeal the Cadillac tax. Although legislation has been introduced, it faces headwinds because the tax is a funding vehicle for the ACA. The fear is that repealing the Cadillac tax without a replacement will increase the deficit. Of course, the increased revenues attributed to the Cadillac tax are a chimera rooted in the false assumption that employees whose benefits are reduced or eliminated will receive wage increases in return.
Short of outright repeal, public employer health plans should be exempted from the Cadillac tax. This would relieve taxpayers of an unnecessary burden without substantially defunding the ACA. If that is not possible, Pennsylvania's congressional delegation, and their colleagues, should support amending the Cadillac tax to:
Adjust "excess benefit" thresholds to account for regional disparities in health-care costs and allow them to rise with health-care inflation;
Exempt measures like on-site employer health clinics that decrease health-care costs; and
Exempt health savings accounts and flexible spending accounts, which make individuals more informed health-care consumers.
To assuage those who will decry the revenue lost from Cadillac tax reform, Congress could increase the fee imposed on health insurers that stand to profit handsomely from the ACA. (Between March 2010 and this month, shares of industry leader UnitedHealth Group Inc. increased 249 percent.) Such a fee would dwarf the Cadillac tax as an ACA funding source and is far easier to predict from a budgetary standpoint.
Unless Congress significantly reforms the Cadillac tax, it will devastate municipal budgets, leaving taxpayers to suffer the consequences of reduced public services, tax increases, or both.
Geoffrey L. Beauchamp is general counsel of the Delaware Valley Health Trust. firstname.lastname@example.org
Jonathan Calpas is deputy general counsel. email@example.com