What's the largest tax break in the federal income tax code? If you guessed the home mortgage deduction, you’d be wrong. It is the tax break for employer-provided health benefits.1 The federal government does not tax the value of compensation provided in the form of health insurance.
Under current law, this tax break will be curtailed for so-called “Cadillac” health plans. Also known as High-Cost Plan Tax, this 40 percent excise tax will be assessed on the cost of employer-sponsored insurance plans that exceed designated thresholds, originally set at $10,200 for single coverage and $27,500 for family coverage. These caps grow annually with inflation. The tax was originally to go into effect in 2018, but the effective date has been twice delayed, most recently to 2022.2
Proponents of the tax believe that overly generous coverage plans (Cadillac plans) create an incentive for high spending by enrollees. The policy objective behind the tax was to slow the rate of growth in health spending by creating incentives to limit “Cadillac” plans and reduce overspending in healthcare. Moreover, the tax subsidy for employer coverage is regressive, reducing taxes most for high-income households and least for low-income households.
Of concern is the possibility that the tax will lead to a cost shift to consumers rather than put pressure on providers for more efficient delivery of care. Some are concerned that the Cadillac tax is too blunt, and may target necessary health spending rather than the “unnecessary” health spending that we’d all like to eliminate. Reducing the generosity of health plans is particularly worrisome for individuals with lower incomes and expensive, chronic health conditions.
While many have long advocated cutting back on tax subsidies for employer-sponsored health insurance, some proposals favor simply capping the employer-sponsored tax exclusion rather than imposing an excise tax. Under all scenarios, however, engaging in an informed discussion over how to allocate direct and indirect government expenditures for healthcare is a conversation we need to have.
1. The Tax Policy Center, "How Does the Tax Exclusion for Employer-Sponsored Health Insurance Work?" (2016).
2. "Public Law 115-120 - Jan. 22, 2018: Fourth Continuing Appropriations for Fiscal Year 2018, Federal Register Printing Savings, Healthy Kids, Health-Related Taxes, and Budgetary Effects," 115th United States Congress.