The Cadillac Tax Attack

1959 Cadillac El Dorado Biarritz

“You think healthcare is expensive now? Wait until it is for free…” PJ O’Rourke

In early 2011, The Boston Globe shared the findings of a 20-page report from the Boston Foundation and Massachusetts Taxpayers Foundation, a report that somberly concluded that cities and towns must substantially increase the amounts their employees are required to pay in out-of-pocket expenses for services and to significantly increase their deductibles. Jeffrey D. Nutting,  Franklin, MA. town manager, complained his town was still facing costs that wildly outpaced declining tax revenues or even the CPI. “Every dollar we spend on health care insurance is a dollar we don’t spend on jobs,’’ he said. “This is all about saving jobs. When insurance costs go up I have cut police, firefighters, or teachers.’’

Nutting said about 10 percent of the town’s $88 million budget now goes to health care costs, and he was facing a double-digit increase for next year. That was 2011.

In 2014, the healthcare conundrum is worsening. Despite the passage of the Affordable Care Act, the average per capita cost to provide health benefits for public employees is averaging as much as $ 20,000 per worker. This is almost twice the national average of most health plans – even higher than private sector bargained plans. The mounting evidence is irrefutable – low co-pay plans with maximum amounts of reimbursement do little to improve health or mitigate chronic illness — and often times lead to overconsumption of services, poor consumerism and limited accountability for personal responsibility around healthcare.

While the private sector has been busy cutting benefits, implementing high deductible plans, health savings accounts, cost sharing, mandatory bio-metric testing and plans designed to promote better consumerism, towns and their employees are still bickering over changing a $10 drug co-pay to a $15.

In the months ahead, we will hear more about a little known provision within the Affordable Care Act    ( ACA) called “The Cadillac Tax”. After an unsuccessfully rare joint opposition from unions and business, the ACA included a provision to impose a 40% excise tax on employers ( public and private) for any benefit plans offered to workers that exceed $10,200 per individual and $27,500 per family. It’s estimated that a large percentage of the bargained plans offered to employees of cities and counties will exceed this allowable limit and trigger the tax on excess amounts. Many cities and counties exceed this threshold today – four years ahead of the tax. The $3.2M question? ( I’m just taking a wild stab at $4,000 excise tax per public employee for a town of 800 workers ) — Are our public officials making provisions to deal with this now or are they tearing a page out of Washington’s self preservation playbook preferring to wait until the crisis is imminent before declaring fiscal martial law.

Its estimated in a recent survey by Consultant Towers Watson that by 2023, 82% of all plans, public and private, will be impacted by the Cadillac Tax – which makes the term “Cadillac Tax” a misnomer. It is really a stealthy first step toward capping or eliminating the last of the two sacred cows of tax exemption – the mortgage interest deduction on your home and the deductibility of employer-provided employee benefits. In the private sector, employers are sobering to this future liability and are planning to either explicitly reduce the cost of their plans, pass on the tax to their employees or simply give employees a stipend of taxable dollars and encourage them to purchase coverage through a public or private insurance exchange.

For towns across the US like New Canaan, the issues will be more polarizing. Many town Board of Education and Public Worker Plans are not integrated, still cling to generous plan designs that offer first dollar coverage with limited co-insurance and out-of-pocket costs and have not embraced the notion of consumer or personal health accountability.

Workers rightfully argue that the cost of healthcare represents a significant economic threat and these benefits insulate them from financial risk. The question is whether such rich plans result in healthier workers or actually drive costs higher by eliminating incentives to be good consumers or take personal responsibility for one’s health? The belief that having comprehensive, low cost benefits insures good health is belied by the consistently high levels of chronic illness and gaps in care that arise in many populations — conditions that arise out of poor lifestyle choices and from those who do not actively manage their chronic conditions. Aside from being poor consumers on the behalf of plan sponsors, people covered under rich benefit plans do not have incentives to change.  Change in health lifestyles typically comes from one of two areas: a pain in one’s chest or a pain in one’s pocketbook.  Employers are recognizing the need for a bi-lateral social contract for personal health with employees and are requiring more from participants.  Bargained plans have historically been opposed to any revisions or Big Brother oversight from taxpayers. As for public officials caught in the middle, the debate is a“ third rail” issue – “You touch it and you die!” It is proverbial line of death.

With the 2010 passage of the ACA, Congress heard from public employees that they needed time to renegotiate the terms of their collective bargaining agreements to determine who would absorb any potential tax penalty. Congress delayed implementation of the law until January 1, 2018. In the interim, there is very little evidence that any public officials are actively moving to discuss the potential for a 40% excise tax on as much as 40% of their benefits costs. The quickest road to being voted out of office is to wait until 2018 and attempt to sell taxpayers on the need to finance a 40% tax that could have been averted by planning and negotiation. The Cadillac Tax will pit tax payers and public workers against one another unnecessarily if leaders don’t act now to project the real costs, monetize these differences and renegotiate in good faith adjustments to wages to make up for inevitable reductions in benefits that will get plans more in line with costs – costs that will rise at twice the rate of private plans if left with rich, low co-pay plans and limited out-of-pocket costs.

In defense of many public workers, public officials for years have often negotiated extensions of rich benefits for retirement or medical benefits in lieu of wage increases. Workers were essentially trading modest cost of living wage adjustments for critical security — the promise of generous medical and retirement benefits. Public officials were obligating future generations of taxpayers to the net present value (NPV) of an obligation that they would not be accountable for – and might actually be a benefit from as a retiree. Workers were smart in understanding that annual medical inflation is multiples of the CPI and that guarantees on limited cost sharing and low out-of-pocket costs for healthcare were worth more than modest wage adjustments. The public officials appeared fiscally conservative to their constituents for balancing budgets while presiding over dramatic unfunded NPV increases in medical and pension liabilities. 2018 is the year of reckoning. Once US plans calculate the potential excise tax, most will conclude that the additional taxes are simply unacceptable.

A recent article in the Washington Post cited the Government Accountability Office warning that “health-care spending represents the single greatest threat to state and local government long-term fiscal health. In 2014, the GAO expects local government spending on health care to stand at 4.1 percent of the country’s gross domestic product; by 2060, that number is expected to jump to 7.2 percent.” Te article goes on to share that a whopping 50% of local tax dollars would need to go to financing healthcare.

Most Americans don’t understand the elements of the Affordable Care Act and tend to judge the legislation on very philosophical or personal experiences. If you have directly or indirectly benefited from the legislation – possibly due to a dependent or loved one previously unable to secure affordable coverage to a pre-existing condition, it’s a god send. Perhaps you were uninsured and now have coverage provided through an exchange at a cost proportionate to your ability to pay, you may be quick to defend the merits of the law. You may be opposed – confused by the Congressional Budget Office’s math which suggested the law would cut the deficit, costing $800B over ten years but offset by $940B in taxes, fees and penalties. A big part of the $940B is expected revenues raised by the Cadillac Tax. As with any corporate tax, these costs inevitable find their way to consumers. As it relates to the public sector, it remains to be seen how we choose to handle the bill.

One thing for sure, the tab for the party is coming due. The big question, is who is going to pay and do our local and state officials have the right stuff to facilitate a balanced dialogue with our valued public employees over how we are going to work together to absorb this tidal wave of taxation.

11 replies »

  1. The truly enlightened accept the fact that artifice, guile and deception are necessary to the advance of social justice. I expect consternation will replace indifference, though, when the Blue Dogs start huddling with Republicans, with a view to striking the hated “individual mandate” from the Act.

  2. How long before this blog talks about the Gruber “incident”, and how it really portrays what Obamacare is about at the end of the day?

    I won’t hold my breath waiting, nor should any responsible and attentive reader and commenter. This blog is so full of it, writing all these posts telling us how this law is going to make health care better and more accountable.

    Oh really? Based on the architects and supporters, lying and misdirecting, and just trying to control the “stoo-ped” voters???

    People who still support this legislative insult and disruption of real efforts to provide care, I would ask you to have some shame and humility and try to admit poor choice, but your allegiance to Obama and the ilk, shame and humility have no place in your crowd.

    Thanks to Gruber, we all know now what the agenda was and still is.

    And this site, for continuing to say fairly much nothing about this profoundly disgusting revelation, well, I think my time here is fairly much over. And a lot of you will be happy.

    For now…

  3. The tax exemption for employer-provided health insurance is the largest, by far, of the tax giveaways we have, or at least it was a few years ago.
    We need to reduce premiums immediately,reduce tax exemptions immediately, and the first place we are starting is in the self-funded market of 200 employees or more.
    The projected savings are going to make a huge dent in the giveaways.
    To learn more, go to nationalprosperity.com
    Don Levit,CLU,ChFC

  4. The late economist, Herb Stein, told us that if a trend can’t continue, it will stop.

    I think the public is starting to rebel against public sector unions. In the election last week, Democrat, Gina Raimondo, was elected governor of Rhode Island despite union opposition because she led the effort as the state’s treasurer to reform Rhode Island’ pension system and reduced the long term unfunded liability by 50%. Scott Walker won the governorship in Wisconsin despite vehement union opposition. Rick Snyder won his race for governor of Michigan despite union opposition because he signed a right to work law in Michigan. John Kasich won a landslide victory in Ohio after standing up to the unions. A pension reformer is leading the union backed candidate for mayor of San Jose, CA. Governor Christie was reelected in NJ after standing up to the unions early in his first term. The trend is moving in the right direction, in my opinion.

    The retirees of Stockton, CA lost their retiree health benefits as a result of the town’s bankruptcy filing. Detroit’s retirees suffered significant reductions as well. Bankruptcy will be a viable option for lots of cities in the future if that’s what it takes to shed much or all of this liability. Union leadership should be smart enough to recognize that and educate their members about the need for appropriate action.

    Plenty of private sector retirees lost their health insurance benefits when their former employers went bankrupt and there is no Pension Benefit Guaranty Corporation that steps in to pay for health insurance benefits. They’re just out of look at least until they’re eligible for Medicare though now they can buy an ACA exchange policy with help from subsidies if they’re income is low enough to qualify for them.

    The private sector is very focused on the Cadillac tax well ahead of its 2018 implementation. I expect to see a significant move toward a defined contribution approach to health insurance benefits and lots of growth in private exchanges for both retirees and active workers.

    I think the tax preference afforded to employer provided health insurance as well as the mortgage interest deduction are very attractive targets for elimination or at least significant curtailment as part of a broad based tax reform effort. I think a broad tax base with lower marginal rates would be very positive for the economy overall and I hope the Congress moves in that direction.

  5. “It’s the same with the mortgage interest deduction, rich man’s subsidy good only if you itemize which drives up the cost of real estate.”

    Yeah. The mortgage interest deduction seems to me to be a zero-sum game anyway. The “benefit” is precisely reflected in the market value of the house. Plus, even the nominal “benefit” is the itemized deduction fractional excess over just taking the std deduction.

  6. “While the private sector has been busy cutting benefits, implementing high deductible plans, health savings accounts, cost sharing, mandatory bio-metric testing and plans designed to promote better consumerism,”

    This has not cut the cost of heathcare, it has transferred costs (same costs) to employees. Do we want to continue on the road of higher costs or focus on also bringing down public employees to private employee misery? This is a solution?

    “…how we are going to work together to absorb this tidal wave of taxation.?

    Look all you hard suffering “employees”, private and public, you’ve been getting a great deal of untaxed employee benefits, while many others do not get any subsidy or tax break and have been hit with the brunt of cost increases directly.

    It’s the same with the mortgage interest deduction, rich man’s subsidy good only if you itemize which drives up the cost of real estate.

    Michael Turpin, is this a call to arms against taxes, or a sobering reality for the inevitable?

  7. Joel:
    I share many of your concerns
    If these pensions and retiree health care benefits were fully funded our concerns would be alleviated
    Unfortunately people disagree over what fully funded means
    For example Medicare Part D is funded 25 percent by beneficiaries and 75 percent by the federal government
    The portion funded by the federal government adds to the deficit and the debt held by the public
    There are a group of people apparently enough to have a named viewpoint called the Trust Fund Perspective
    They believe Part D is fully funded because the federal government can never run out of money
    Don Levit

  8. Gotta love disingenuous and dishonest dialogue about health care, costs, and consequences. This story says more than just age limits to Americans per 2014 calculations:


    If Americans by in large can expect to get to later 80s into their 90s in the next couple of decades, 2 things need to be realized with that:

    1. who is going to pay for all that health care that WILL be needed to keep these people alive? Not the elderly patients gettin’ the care, that is for sure!

    2. who is going to pay all those pensions for people who just work at best 40 years of life and then expect to get paid retirement incomes for at least 25 to as much as 40 years per when one retires? Again, not these retirees who I doubt paid into the system what they will get out of it.

    It is truly disingenuous and dishonest for those who ignore, dismiss, or just deny what those numbers really mean at the end of the day. I am NOT advocating we push for euthanasia for people over 80 years old, but, when the quality of life for a definable majority of people over 80 is marginal at best, what are the supporters of “live life as long as possible” going to say WHEN the younger generation realizes they are just grunts for the old??

    See the list for what toddlers say to “it’s mine” to realize why the elderly are just large children at the end of their lives:


    the last sums it up for the American attitude growing logarithmically these days, and don’t deny it:

    “10- Once it’s mine it will never belong to anyone else, no matter what”

    Gee, seems to sound like Obama too….

  9. Exactly right. Unfortunately, our society has gotten used to the idea that health insurance buys us health. All it really does, or should do, is protect us from insolvency due to a catastrophic health condition. In the meantime, the separation of the patient from the costs has resulted in absurdities like a bill for a CT scan for $4000, the insurance cuts $3000, and the patient pays $1000.
    Addtionally, municipalities and governments have made unkeepable promises to the labor consituencies and as a consequence these entities are facing major cutbacks or bankruptcy like Detroit.
    Now the ACA comes along which is really insurance reform, not healthcare reform, and the piper is calling for his payment.
    We can only hope that our 2 parties which have spent more time sniping at each other than legislating will somehow come up with a reasonable solution to make EVERYONE (providers, hospitals and patients) more responsible for healthcare, while not breaking the bank.

  10. Is the Cadillac tax indexed for inflation?
    This tax shows vividly the serious situation of premium affordability
    Paying $27,500 a year is like a mortgage payment with no equity
    We need to improve health care choices individually
    I agree with many of the recommendations in the article
    Those improvements will help save cost over time
    We need to reduce premiums immediately
    This can be done on an individual basis which translates into significant immediate savings for employers on a group basis
    Due to discrimination laws we have decided the savings flow to the employer who can divvy up the savings per employee dependent and spouse so that each are paying the same lower premium
    each year
    Savings accrue from the pooling effect
    Actuarial realities translates into mathematical savings
    To learn more go to nationalprosperity.com
    Don Levit,CLU,ChFC

  11. You and many other authors continue to call insurance “healthcare”…

    It is not.

    Can’t wait until they start taxing benefits received as 1099 income.