The Cadillac Tax: Projections, Policy Alternatives, and Second-Order Effects
The Affordable Care Act (ACA) establishes a 40 percent excise tax on high-cost employer-sponsored health insurance plans that will be implemented in 2018. The purposes of this “Cadillac” tax are to limit the growth of health care costs, reduce the incentive for employers to provide excessive health insurance benefits, and raise revenue to fund the ACA. The fate of the Cadillac tax remains unclear; many of the 2016 presidential candidates have proposed altering or eliminating it despite widespread support for the tax among economists. This session will present a nuanced examination of the Cadillac tax’s considerable impact on firms and their employees. The first paper analyzes the effects of the Cadillac tax on wage and health insurance benefits growth and whether it will achieve its goals. Unlike previous analyses, it models employers’ responses to the Cadillac tax using a theoretical model in which employers face a tradeoff between wages and health insurance benefits on a kinked budget constraint. The second paper compares the Cadillac tax to a revenue-neutral cap on the tax benefits of employer-sponsored health plans. Several presidential candidates have proposed this alternative. The last paper analyzes state-level variation in premiums for employer-sponsored plans and the share of workers exposed to the Cadillac tax in future years, and contrasts the Cadillac tax with other approaches to providing tax subsidies for health insurance, such as the ACA Marketplace credits. Collectively, this session will provide attendees with an in-depth understanding of how the Cadillac tax will alter employer-sponsored insurance.