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A Project of The Annenberg Public Policy Center

Cadillac Plans and the Middle Class

The liberal group Health Care for America Now is airing an ad that argues against a tax on high-cost employer-provided health care plans, a revenue-raising aspect of the Senate Finance Committee bill. "Some senators say they want to tax so-called ‘Cadillac’ health care plans, but those proposals will also tax the benefits of millions of middle class workers," the narrator says as an on-screen graphic pops up, claiming "40% tax on health care benefits of middle-class workers."

That’s a bit misleading. Most workers wouldn’t be affected at all, for starters. And even for those who are affected, it’s not a 40 percent tax on the value of all their health benefits, as the ad implies. The tax would fall only on the value of benefits that exceeds $21,000 a year for a family or $8,000 for an individual. (There are even higher cut-offs for retirees older than 55 and those in high-risk professions.) So, for example, a family plan costing $22,000 would generate a tax of $400 (40 percent of the $1,000 excess value). The tax is on the insurer, not the family. But such taxes are passed along to the consumer one way or another – for instance, an employer paying a higher premium might raise premium copays for workers.

Unions have indeed argued that the excise tax would affect some of their members, who may have conceded pay raises for a boost in benefits. But would "millions" of "middle-class workers" have these "Cadillac" plans?

A spokeswoman for HCAN pointed us to a report by the Communications Workers of America union, which cites data from the nonpartisan Joint Committee on Taxation as well as Citizens for Tax Justice, an advocacy group that, according to its site, works for “fair taxes on middle and low-income families” and “requiring the wealthy to pay their fair share.” The report says that "the tax is projected to affect up to 40 percent of health plans by 2019 – just six years after it takes effect – according to a preliminary analysis by the Joint Committee on Taxation." (The thresholds for the tax will rise each year but not by as much as employer-sponsored premiums have been increasing.) But that 40 percent figure would be true if employers, and insurers, do nothing in reaction to the new tax, as the New York Times also reported.

The JCT doesn’t think employers will do nothing. In fact, it estimates that the majority of the revenue the government will bring in from the measure won’t actually come from the excise tax itself. Both the JCT and nonpartisan Congressional Budget Office believe employers and employees would choose less expensive plans that fall under the cap, leading employers to increase wages instead. Those increased wages would then be subject to payroll and income taxes, unlike the health benefits. CBO Director Douglas Elmendorf said in congressional testimony Sept. 22: “[I]mposing this tax would, in our judgment together with the Joint Tax Committee staff, reduce health spending over time by make – by removing what is essentially a subsidy in the current tax code to buy more health insurance relative to buying things that you have to purchase with after-tax income.”

The CWA report acknowledges that 70 percent of the money the JCT predicts the government will make from the tax comes from those additional payroll and income taxes. As CWA sees it, workers who get higher paychecks in lieu of better benefits are still workers who are affected by the excise tax. "In effect, workers’ health care benefits will be taxed as new income," the union argues.

It says that "about one‐third of middle class households making between $50,000 to $100,000 will be affected by the excise tax by 2019," and that’s either because their plans are above the threshold, or they’re paying more income taxes and getting a cheaper insurance plan that falls under the cap.

"We think a lot of plans are going to be affected and people are going to be hit in two ways," says CWA’s Frank Clemente, the author of the report. "The employer is going to lower the benefit, that’s a direct hit on people’s benefits." Or employers will lower benefits and give workers more money. If that’s true, dollar for dollar, he told us, "the worker is still losing 25 to 30 percent of that value, because they weren’t paying taxes when they got the benefits."

CWA also doesn’t buy the idea that employers will give out raises if they lower their health care costs. "Proponents of the excise tax claim that workers will not lose under the excise tax because any health benefits cuts will be offset by an increase in their wages," the CWA report says. "Based on years of bargaining with some of the nation’s largest employers CWA does not believe this to be true."

The JCT and CBO clearly disagree.

It’s an individual opinion whether one values a bump up in pay versus a high-cost plan, and it’s unclear how much of a cut in benefits many workers would experience to get their plans under the thresholds. Clemente says that when faced with a less-benefits-for-more-pay tradeoff CWA members "almost always go with keeping the benefits." But when the HCAN ad says that the proposal will "tax the benefits of millions of middle class workers," that loose estimate would include both workers whose premiums exceed the tax thresholds and those who get raises, which will then be taxed.

Right now, the threshold ($21,000 for a family plan and $8,000 for an individual) is well above the average cost of employer-sponsored plans: $4,824 for an individual policy and $13,375 for a family, according to the Kaiser Family Foundation. Clemente didn’t know how many CWA members currently have premiums that exceed the bill’s thresholds.