Acting on the principle “Why put it off until tomorrow when you can do the wrong thing today?” the House of Representatives last week voted to repeal a tax that is not scheduled to take effect until 2022. The vote against the “Cadillac tax” was 419-6, a reminder that “bipartisanship” often is the political class coming together to sacrifice the national interest to its own.
Repeal of the promised tax of 40 percent on a portion of the most lavish employer-provided health care plans would enlarge projected budget deficits by almost $200 billion in a decade. This, however, is minuscule considering the projected — and planned — deficits of $11.4 trillion in a decade. From the political class’s point of view, the beauty of enormous deficits is that they make increments of mere hundreds of billions seem not worth bickering about.
Employer-provided health insurance is not taxed as what it obviously is: compensation. With this enormous subsidy to fortunate employees, the government forgoes about $300 billion in annual revenues. But lost revenue is not the primary problem. This is: The tax was proposed not just to help fund Obamacare but also as an incentive for restraining the rapid growth of health care costs. Because the tax break — treating important compensation as untaxable — is unlimited, Alan D. Viard of the American Enterprise Institute says, it encourages employers to provide high-cost plans “that cover routine care and feature low deductibles and co-payments. Those plans increase the demand for medical services and drive up costs for other patients.”
James Capretta, also of AEI, recalls that candidate Barack Obama campaigned in 2008 against “taxing health benefits” but as president became convinced that it was too costly to leave the perverse incentive in place. Capretta says Republicans are mistaken if they “think that reforming the tax treatment of employer-based health insurance is not central to building a market-driven health system.” He says “it is impossible to rid the system of inefficiency and waste when so much private insurance is financed by open-ended federal tax subsidies.”
