The United States health care system has been dominated by employer-sponsored health insurance for decades. Some 158 million Americans are estimated to receive their coverage through their employer, according to the most recent research brief from JLF’s Jordan Roberts. Roberts explains how this system came to be:
Employer-sponsored insurance became very common during the World War II era. The federal government placed wage caps on employers to control rising wages and prices. However, as a concession, the federal government decided to exempt employer-provided health benefits from income and payroll taxes. Despite the wage caps, employers could now compete for labor by offering generous, tax-free health benefits. The natural result of this was that many employers started offering health insurance to employees.
This tax-exempt status has been a source of controversy for years, but this sweeping tax exemption is set come to an end in 2022 – at least for now. According to Roberts:
The Cadillac tax was introduced as part of the Affordable Care Act when President Obama signed the law in 2010. Initially, the tax was to take effect in 2018. However, legislation was passed in 2015 that delayed the law until 2020, and another piece of legislation in 2018 delayed the implementation of the tax until 2022.
The Cadillac tax is a 40 percent tax on employer-paid health insurance premiums above $11,200 for an individual and $31,000 for a family. According to a report from the Kaiser Family Foundation, if the tax is implemented, it could affect one in five employer-backed plans. Many workers and employers oppose the tax. Jordan writes:
Believe it or not, labor unions and large employers are generally on the same side on this issue. They want to see the tax repealed. It is cheaper for employers to provide tax-free health benefits than taxed income. Those who believe the tax should be repealed also believe that if the law were implemented, employers would find ways to shift the additional costs imposed through the tax to the employees through higher deductible plans.
However, healthcare economists believe the tax should go into effect. Roberts explains:
[A] sizeable number of prominent scholars agree that the tax should go into effect. Over 100 health economists and policy analysts from the Right and Left sent a signed letter to Majority Leader Mitch McConnell and Minority Leader Chuck Schumer [in favor of the tax]… Those who support the tax believe that it will incentivize employers to find creative ways to provide the same level of coverage and reduce costs to avoid the tax. Or, per the law’s intention, employers will reduce the generosity of their plans, incentivizing patients to cut costs and shop for cost-effective providers.
The U.S. House of Representatives voted 419-6 to repeal the tax in mid-July. It is unclear whether or not the bill will make it to a vote in the Senate.