July 01, 2013 Tax Law

Why the Health Insurance Cadillac Tax Needs a Tune-Up

Eleanor Hagan

The cost in federal tax revenue lost under the Patient Protection and Affordable Care Act and the Reconciliation legislation (collectively ACA) must be offset either by increases in tax revenues or by cuts in spending. Along-side the reforms to the insurance market are several revenue-raising provisions that will help pay for the ACA’s implementation. Among these is an excise tax on high-cost health insurance plans, the so-called Cadillac Tax.

The Cadillac Tax. The reasons for altering the tax treatment of employer- sponsored insurance (ESI) as part of an effective health care overhaul are three- fold: finances, behavior, and equity. First, the tax-exempt status of ESI is a massive drain on the U.S. Treasury. Second, health insurance has long been thought to promote moral hazard in the insured; they have less of an incentive to avoid preventable health risks because they will not bear the full costs of those risks. Finally, the tax treatment of ESI raises concerns about vertical and horizontal equity.

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