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.
The 2010 Affordable Care Act originally included a requirement that this tax break be curtailed for so-called "Cadillac" health plans. Also known as the High-Cost Plan Tax, a 40 percent excise tax was to 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, with the caps set to grow with inflation. Originally to go into effect in 2018, the Cadillac Tax was twice delayed and then repealed completely as part of the FY2020 spending bill passed on December 20, 2019.2
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 the 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, 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. Golden, Ryan, "Trump Signs Bill Repealing ACA Cadillac Tax, Granting 'Relief' for Employers," HRDive (December 23, 2019).