One of the reasons why health care expenditures keep on climbing is because employer-sponsored health insurance is a tax-free employee benefit. Forbes contributor John Goodman explains:
“Take a worker in the 30 percent tax bracket (income and payroll taxes combined). If an employer tries to give this worker a dollar in wages, Uncle Sam will take 30 cents – leaving the worker with only 70 cents in take-home pay. But if the employer spends the dollar on health insurance, Uncle Sam gets zilch. That means the health insurance could be worth only 71 cents on the dollar and still look attractive. No wonder our health care system is so wasteful.”
Obamacare’s ‘Cadillac tax,’ set for implementation in 2018, is not only supposed to help pay for the law but also to bring more consumer awareness regarding overuse of overly generous health plans provided by businesses. In an economist’s language, the policy wants to reduce moral hazard.
Therefore, a 40 percent excise tax will be levied on the amount exceeding the following thresholds:
- Individual health plans costing more than $10,200
- family health plans costing more than $27,500
Conservative ‘repeal and replace’ plans would also keep intact a similar mechanism in hopes of slowing the growth of health care spending by simply capping the tax-exclusion of employer-sponsored health insurance. Any spending beyond the cap would be taxed and used to finance refundable tax-credits for low and middle income individuals for the purchase of health insurance that suits their medical needs.
But as Goodman points out, the tax doesn’t necessarily solve the problems of unnecessary spending induced by tax-free health insurance provided to over 150 million Americans. And, if it isn’t dead before 2018, it could end up penalizing those who already are cost conscious users of the health care system (those with high deductible health plans combined with health savings accounts).
