The Affordable Care Act (a.k.a. Obamacare) is replete with bad policies. The so-called Cadillac tax is not one of them.
The tax, which would impose a 40% charge on the value of any employer-provided health insurance above $27,500 for a family, is set to be imposed in 2018. Politicians on both the left and the right have set their sights on repealing the provision. Several Republicans recently announced they would be introducing a bill to repeal it shortly after Congress is back in session, and they hope to bring it to a vote by year’s end.
That the Cadillac tax is in the crosshairs of conservatives is maddening; allowing employers to provide health insurance tax-free to their workers is terrible policy, a truism that any honest economist—whether liberal, conservative, or otherwise—would agree with. The pre-Cadillac tax status quo creates two perverse incentives: First, workers end up with more health insurance than they would ever purchase on their own (since tax-free health insurance is worth more than income that’s taxed at 30%-50%), which gives people less take-home pay to spend as they see fit.
Second, more generous health insurance entails lower co-pays as well as other provisions that insulate the worker from the actual cost of their health care. As a result, people become less sensitive to prices when seeking health care, and they consume more of it—most of which does nothing to improve health outcomes, numerous studies have shown. The notion that there are gigantic savings to be had by nudging the populace to seek out preventative care early is a myth, studies have shown. Generous insurance with low or non-existent co-pays results in the cost of healthcare increasing faster than if people bought health insurance (or health care) on their own.
The relevant question for economists, then, is how to fix this market distortion. For a long time, Democrats argued that we needed to replace the deductibility of employer-provided health care insurance with a credit that would be capped at some nominal level, which would incentivize companies to provide more basic health insurance while also making the tax expenditure less regressive. In 2007 the Bush Administration proposed doing precisely that in their budget proposal, and the McCain campaign (which I was a part of) followed up on that and proposed something similar.
The Obama campaign pivoted on a heretofore Democratic principle and made attacking McCain’s healthcare plan a focal point of their campaign. By one estimate they spent nearly $100 million on ads that objected to the plan.
Upon assuming the White House, the president’s aides recognized that any health reform would need to have something akin to a Cadillac tax in its mix if they truly wanted to do something to reduce the growth of health care costs. It created numerous painful conversations with Republicans (who were done discussing the idea with Obama) as well as Democrats, many of whom had trashed the McCain proposal in their own campaigns. In essence, over the course of 24 months the Cadillac tax went from being a Democratic idea to a Republican one to one that was anathema to both sides.
Ultimately, a watered-down version of the Cadillac tax survived: It begins in 2018 and will be a 40% tax on the value of employer-provided health insurance above $27,500 for a family, indexed to inflation. Conservatives should not oppose it. A tax code should be as free of unproductive exclusions, deductions, and credits as possible, and the health insurance exclusion isn’t just unproductive—it’s downright harmful. With full repeal politically untenable, the Cadillac tax gets rid of a portion of the deleterious effects of employer-provided health insurance without impacting the vast majority of working Americans.
Tax reform proponents make precisely this argument when it comes to figuring out how to “pay for” lowering tax rates, but invariably keep such talk vague. If we are going to embrace this tax expenditure, we may as well end all tax reform discussion here and now.
Conservatives are right to oppose many of the reforms of the Affordable Care Act, but the Cadillac tax is its one provision that adheres to conservative precepts. Opposing it just because it came from the Obama administration is not just banal—it reinforces the meme the liberal media likes to put forward that conservatives are largely unserious and are unprepared to govern.
Good policy should be pursued regardless of the opposition’s preferences. Keeping the Cadillac tax in place represents precisely the sort of policy—and politics—the Republican party should embrace.
Ike Brannon is a Senior Fellow at the George W. Bush Institute and President of Capital Policy Analytics, a consulting firm in Washington, D.C.