Obamacare 'Cadillac Tax' Hits Middle Class Hardest: Study

The controversial Obamacare provision to tax generous employer-based health benefits will hit middle class families especially hard, while largely sparing wealthy Americans, a new analysis has found.

As a result, the so-called “Cadillac Tax” amounts to "regressive" tax subsidy that unfairly favors the rich and harms those with incomes between $38,550 and $100,000, according to the study by Drs. Steffie Woolhandler and David U. Himmelstein, professors of health policy at the City University of New York School of Public Health and lecturers in medicine at Harvard Medical School.

"Taxpayers should be paying directly for healthcare through Medicare-for-All, not indirectly through tax subsidies to private insurance. However, removing the tax subsidies — as Obamacare will do — without setting Medicare-for-All in place is a step backwards. It's shameful that economists have provided cover for this tax that will hit middle-class families and largely spare the wealthy," said Woolhandler.

The article, published this week in the International Journal of Health Services, notes that about half of Americans are covered by employment-based health insurance.

"Both employers' and employees' payments for such coverage are exempt from income and payroll taxes, an exemption that provided a tax subsidy of $326.2 billion in 2015," Woolhandler and Himmelstein write.

"For years, economists and health policy analysts have criticized these subsidies on two grounds, claiming they (1) encourage over-insurance, resulting in the frivolous use of unneeded care, and (2) that the subsidies are regressive, that is, disproportionately benefiting the rich."

Such claims, they argue, are behind the tax provision of the Affordable Care Act, which imposes a 40 percent excise tax on employer-based plans that exceed $10,200 for individuals or $27,500 for family coverage in 2020.

By some estimates, as many as 50 percent of companies that provide health benefits would have to pay the tax, which is likely to be passed onto employers. Many companies are also expected to cut health benefits — including the provision of Flexible Spending Accounts — to stay under the tax threshold, health policy analysts have suggested.

To calculate the impact of the tax, the authors drew on a 2009 study by controversial economist Jonathan Gruber, who helped design the tax, and data from the U.S. Census Bureau, the Robert Wood Johnson Foundation and the World Top Incomes Database.
The net impact of the tax could be to fuel already-troubling disparities in health coverage in the U.S., the authors argue.

"Employers seeking to avoid the tax will probably increase copayments and deductibles. Even if most of the employers' premium savings were eventually passed on to workers as higher wages, the higher out-of-pocket costs would discourage most low-income families from seeking care — exacerbating inequalities in health and healthcare," they say.

Woolhandler and Himmelstein are co-founders of Physicians for a National Health Program, a nonprofit organization that advocates for single-payer national health insurance.