The Affordable Care Act's ‘Cadillac Tax' Could Create Regional Inequalities in Worker Costs

The Affordable Care Act enacted the so-called “Cadillac tax,” provision, which will apply a 40 percent excise tax on total employer health insurance premiums in excess of $10,200 for single coverage and $27,500 for family coverage starting in 2018. The Cadillac tax alters the current tax treatment of employer-provided health insurance, which excludes employer spending on health premiums from income and payroll taxes. Economists argue that the current tax exclusion encourages over-consumption of health care, favors high-income workers over lower-income workers, and reduces revenue for the federal government. In this issue brief, we present analyses that suggest that the Cadillac tax is a “blunt instrument” for addressing concerns about the employer tax exclusion, because it will affect workers in high-cost geographic areas sooner than it affects workers in lower-cost areas. For each state, we identified the first year in which 10% or more of workers with employer-sponsored coverage are projected to be directly impacted by the Cadillac tax—Alaska and New Jersey are projected to cross this threshold within the next 5 years, whereas some other states will not cross this threshold for 10 years or more. In addition, the tax does relatively little to address the regressive nature of the current employer tax exclusion, and may penalize firms and workers for variation in premiums that is outside of their control. An alternative approach to addressing the shortcomings of the employer tax exclusion might allow for regional adjustments in health care costs when defining what plans might be subject to an excise tax or an exclusion cap.  Other modifications could go further in terms of eliminating aspects of the tax exclusion that favor high-income over low-income workers.  For example, the current employer-tax exclusion could be replaced with tax credits for employer coverage that scale inversely with income.