In The Washington Post today, Jonathan Gruber of MIT defends the provision in the Senate bill to lessen the tax advantages of health insurance plans with premiums of more than $8,500 for singles and $23,000 for families. I mentioned in my post on the Senate bill that I was not a fan of the "Cadillac tax." Gruber acknowledges but then ignores the main criticisms of this provision:
But there have been numerous criticisms of the Senate financing. Perhaps the strongest is that some insurance plans will be "unfairly" burdened. For example, firms with older employees may have higher insurance costs not because their plans are more generous but because the employees themselves are more expensive to insure. Thus, many claim that this is a tax not on excessively generous insurance plans but on those who happen to have high insurance costs.
But this argument misses an important point: The assessment proposed in the Senate is not a new tax; it is the elimination of an existing tax break that is provided to exactly these firms.
The argument does not miss that point. It simply questions why the "Cadillac tax" raises the after-tax cost of health insurance for groups that are more expensive to insure along with groups that have chosen a more expensive way to structure their health insurance.
If the concern is inefficient and excessive use of health services, then why not go a bit further and disallow the exclusion of health insurance from taxable income for the cost of any plan beyond what it would cost to insure the group under a high-deductible, catastrophic health insurance plan?
Political Realities vs. Ideological Stances
I understand your argument, but in my opinion, this is a situation where political realities bump up against ideological stances.
From an ideological point of view, I agree with one of your points. I think it is unfair to disadvantage those groups who require expensive health care as opposed to those who do not. Each group should have the same tax advantages as it relates to their health care expenses.
But I disagree with your second point about groups that have chosen to structure their compensation with lower salaries and more generous health care benefits. The reason these groups have chosen to do this, as I understand it, is mainly because one dollar of health care benefits is greater in after-tax value than one dollar in salary because the health care benefits are not taxed. And from a corporate perspective, both expenses are tax deductible, so companies are largely indifferent. If this is the case (I would appreciate your perspective if I am incorrect here), then really the groups were just using the tax code in their favor to ultimately give themselves a higher total compensation package. I am not faulting them for this, but I also don’t think it is unfair when the government changes the tax code to avoid this sort of behavior. The “Cadillac tax” is really just trying to remove the inequities in the tax code. That is why I am not sure I understand how one can make the first point and the second point at the same time. The first point attempts to argue for an equitable tax law as it relates to health benefits, but the second point seems to be against a change that attempts to make the tax law slightly more equitable.
But it seems like you might agree, as I do, that a very beneficial change to our current health care system would be making all health care benefits taxable. In my opinion, this would significantly “bend the curve” in the future as the general public would become much more aware of how much their total employer provided coverage is costing them and thus put the kind of pressure on premiums and costs that doesn’t exist today. If one agrees with this, then one has to decide if a small step, like a tax on “Cadillac” plans is worth the unfair treatment mentioned in your first point. A tax on “Cadillac” plans, in my opinion, is a clever way to tax health care benefits in the future, as long as the cut-off level increases less than inflation. Taxing all health care benefits would be better, but because Obama made this politically impossible by opposing the measure in his campaign, I am forced to weigh the political realities of what can be done today, versus my ideological position of what should be done. I think the benefit of putting something in place today that might eventually get the tax code to a more equitable position in the future is worth the sacrifice.
I would love to hear your thoughts.
Public employees often get higher coverage
As compensation for lower $ remuneration. Public employers like to attract "lifers"; they offer comp packages that have good insurance, good retirement benefits, and lower cash salaries as compared to the private sector.
So, the "Cadillac" tax is likely to hit a bunch of, say, Vermont teachers making $30-$50k per year. This is the type of group (I think) that Andrew was worried about in the first place.