Affordable Care Act Cadillac Tax Will Smack Middle Class, Spare the Wealthy

The Cadillac tax will carry a 40% nondeductible excise tax on employer-based plans greater than $10,200 for individuals and $27,500 for families.

A new study has found that the Affordable Care Act’s “Cadillac” tax, which puts a tax on more expensive health benefit packages, will have the greatest impact on the middle class.

This tax is expected to hit families the hardest with incomes ranging between $38,550 and $100,000, while having little to no effect on wealthy families, according to analysis published in the International Journal of Health Services.

“Taxpayers should be paying directly for health care through Medicare-for-All, not indirectly through tax subsidies to private insurance,” said researcher Steffie Woolhandler. “However, removing the tax subsidies - as Obamacare will do - without setting Medicare-for-All in place is a step backwards. It's shameful that economists have provided cover for this tax that will hit middle-class families and largely spare the wealthy.”

The study was conducted by professors of health policy and management at the City University of New York School of Public Health.

“Most Americans are covered by employment-based health insurance,” said David U. Himmelstein and Woolhandler. “Both employers' and employees' payments for such coverage are exempt from income and payroll taxes, an exemption that provided a tax subsidy of $326.2 billion in 2015.”

The study noted that economists and insurance analysts have criticized these subsidies for promoting over-insurance that leads to the frivolous use of unnecessary care and providing regressive subsidies that disproportionately benefit the wealthy.

The Cadillac tax is expected to take effect in 2020 and will carry a 40% nondeductible excise tax on employer-based plans greater than $10,200 for individuals and $27,500 for families.

“(Since the upper limit on the cost of these plans) will be indexed to overall inflation rather than to health care inflation — which is almost always faster, over time more and more employee groups will be hit by the tax, or by a cut in benefits to avoid it,” the authors wrote.

During the analysis, researchers relied upon a 2009 study by economist Jonathan Gruber who was involved in designing the tax. They also used data from the United States Census Bureau, the Robert Wood Johnson Foundation, and the World Top Incomes Database.

The findings were then categorized by family income quintiles, which include both a table and chart.

“The tax subsidy is a big help for people with (2009) family incomes of $38,550 to $100,000, but not for those with lower or higher incomes,” the authors wrote.

According to researchers, the result of the new tax on benefits “will hit the middle class hardest and spare the wealthy.”

Furthermore, the Cadillac tax aims to eliminate subsidies and over-insurance, however, this will have a ripple effect that will disproportionally harm workers with lower incomes.

“Employers seeking to avoid the tax will probably increase copayments and deductibles,” the authors wrote. “Even if most of the employers' premium savings were eventually passed on to workers as higher wages, the higher out-of-pocket costs would discourage most low-income families from seeking care - exacerbating inequalities in health and health care.”