THE MISUNDERSTOOD “CADILLAC TAX”

Today, leaders of organized labor met with President Obama at the White House to discuss the so-called “Cadillac Tax” on high-cost benefit plans that is a major source of funding in the Senate version of health reform. While the House levies a surtax on wealthy Americans to partially finance its version of health reform, the Senate and White House have indicated that they intend to stand by the Senate’s 40% tax on “generous plans.” They believe it is the only way to maintain the tenuous hold on the necessary 60 votes.

House Democratic leadership has promised a fight over the tax. 190 Democrats have signed a letter opposing the tax, and organized labor is mounting a major last change effort to fight the tax.

Despite the contentious debate, it has been a little looked-at fact that the Senate’s 40% levy on health insurance premiums is the one source of funding that could keep pace with the rising resources devoted to health care. Initially, this levy would apply (with some exceptions) to insurance plans that cost over $8,500 annually for an individual, or $23,000 annually for a family. These threshold amounts would increase each year by the average rate of inflation plus one percent.

What is spent on health care consistently rises substantially more each year than does the average inflation rate. Thus, over time, the effect of the “Cadillac Tax” would be that larger and larger proportions of those with health insurance would begin to pay the tax on gradually rising portions of their premiums.

This would mean that the level of health care for all would effectively be set by the collective decisions of many citizens (and employers) deciding what premiums they were willing and able to pay for health insurance, with the cost of covering the uninsured taken into account in those decisions. As the level of available health care changed, the health care available to those otherwise unable to afford it would change with it. A rising tide really would lift all boats. [Compare NRLC's plan to extend healthcare without rationing here and an explanatory webinar here.]

The Senate cannot even lose one Democrat and is standing by its 40% levy. The House continues to object. With the strong opposition from organized labor, combined with 190 Democrats in opposition to the provision, health care restructuring could be derailed by the defection of even a small number of House members.