Everyone likes having health insurance. Nobody likes taxes. So the growing campaign against Obamacare’s tax on expensive health plans was to be expected. But this tax deals with a root problem in the U.S. health care system, and it would be better to fix it than to kill it outright.
The tax is meant to address a critical weakness in the way Americans pay for their health insurance: The coverage they get from their employers — unlike salaries — is not subject to income or payroll taxes. This exemption is wildly expensive. It’s also regressive: The top 10 percent of earners get 30 times the financial benefits as the bottom 10 percent, because they’re in higher tax brackets.
Worst of all, leaving employer-provided insurance untaxed distorts the market, leading companies to provide more of their compensation in the form of health coverage and less as wages. That helps explain why 18 percent of U.S. economic output goes toward health care — almost twice the average for industrialized countries.
The Affordable Care Act is meant to change things, starting in 2018, by levying a tax on so-called Cadillac employer-sponsored insurance plans — the slim minority that cost more than $27,500 for a family. The goal is to get companies to keep their spending below the threshold and direct the savings toward higher wages.
The tax’s critics complain that it will encourage employers to shift more health care costs to employees. They also argue that if health care cost growth returns to its prerecession speed, the tax will soon enough apply to most people’s insurance plans.
Those fair criticisms can be addressed without scrapping the tax. A better solution is the one proposed by a group of Republicans: Simply tax as regular income the value of health insurance above a certain amount.
Because the income tax is progressive, applying it to health insurance would spread the burden more fairly than the Cadillac tax and the existing exemption for health insurance do. And this approach would not give companies nearing the threshold the same incentive to drastically cut benefits.
The tax exemption for health insurance has persisted not because it’s good policy but because it’s always hard to take back tax giveaways. Obamacare’s attempt to bite the bullet can be improved on, but it shouldn’t be abandoned altogether.