The Cadillac Tax Was Killed In The Worst Possible Way

December 17th, 2015

Buried among the thousands of pages of the new omnibus spending bill is a two-year delay of the Affordable Care Act’s Cadillac Tax. While the White House feigned that it would veto an outright appeal, Josh Earnest has now downplayed the effect of the delay, calling it “minimal.” Sen. Dick Durbin (D-Ill.) said, “I don’t think the White House was excited about it, but it was not a deal breaker.” But this is not simply a two-year repeal. It will never go into effect. Every two years, there will be a massive fight waged by Big Business and Big Labor to continue delaying its implementation, along the lines of the never-ending “Doc Fix,” which was finally resolved earlier this year. So this is a repeal by any other names.

So why am I not celebrating the effective repeal of one of the most unpopular provisions of Obamacare? Because it was killed in the worst possible manner. Politico observes that “The Cadillac tax delay, meanwhile, gives Republicans ammunition for future battles over the Affordable Care.” This isn’t accurate.   All of the candidates running for office agree that it should never go into effect. What President would ever want to be responsible for implementing a wildly unpopular provision. It’s much easier to simply add to the deficit, render the law unstable, and collect revenues from elsewhere.

Moreover, as Brian Blase notes at The Apothecary, what makes this repeal so awful is that it does nothing to mitigate the distortions that result from allowing health insurance benefits to remain untaxed.

The Cadillac tax treatment in the Omnibus legislation contains almost the worst possible outcome. It delays the Cadillac tax for two years and changes it from a non-deductible tax to a deductible tax if it ever takes effect. (Making the penalty deductible reduces the effect of the tax.)

It is most difficult to get preferential tax treatment in a tax or spending bill the first time the provision appears. So, the Cadillac tax delay is a big win for Big Business and Big Labor. By making the penalty fully refundable, the Cadillac tax, if it ever takes effect, is weakened. However, Big Business and Big Labor now have very good reason to believe that the Cadillac tax will never take effect.

This repeal amounts to a kickback to labor unions, as their major appeal is generous benefits benefits, which are not taxed.

Finally, for all of the hand-wringing by ACA supporters in the Democratic caucus about fighting Republican efforts to “gut the statute,” the repeal of the Cadillac Tax does that in painful ways.

How many times did we hear that the elimination of the subsidies, were King v. Burwell victorious, would topple the so-called three-legged stool? Peter Orszag explains how the repeal topples one of the legs.

When the law was being developed, there were divisions within the White House and Democrats in general over how much to prioritize cost control.

Peter Orszag, a former top White House official who worked on the law, said the push for repeal is exposing those lingering tensions among backers of reform and its three pillars: coverage expansion, budget neutrality and cost control.

“The coalition in favor of those three pillars always had some tension in it,” Orszag said. “When elements of that coalition just pick out their favorite pillar and are willing to jettison the other two, the irony is they may end up harming the thing they think is most important.

“If you lost one of the three legs, the whole thing becomes much less sustainable,” he added.

Orszag tweeted that the repeal is the “biggest threat” to the ACA, and makes repeal much more unlikely.

What do we hear now? Crickets.

“If the Cadillac tax disappears, I think it likely means that over the course of time, that health care costs will rise somewhat more rapidly,” says Robert Greenstein, president of the left-leaning think tank, Center on Budget and Policy Priorities. “That poses problems for everyone — for the federal budget, employers and the economy, not just for coverage purchased through the exchanges.”

Increasingly, that argument did not matter to Democrats, even those who long supported the Affordable Care Act.

As costs go up, fewer people will buy insurance, and the funding from the Cadillac Tax will no longer be able to be used to keep costs low. This cycle gets worse and worse and worse. Still, crickets.

But this is nothing new. This ACA has been built on so many broken promises and mistruths. Supporters insisted that the law would be budget-deficit neutral, and even reduce the deficit. That was tossed out the window with the repeal of the Cadillac Tax. Supporters insisted that the law would bend the cost curve. Now, that won’t happen. Supporters insisted that people could keep their doctors if they liked them. That was tossed out the window with tightened minimum essential coverage requirements. Supporters insisted the law would implode without an individual mandate. Yet it has been delayed and waived in so many situations, risking a potential adverse selection death spiral. The reckless manner in which this law has been implemented–a sort of fly-by-the-seat-of-your-pants approach to healthcare reform–has been stunning. The supporters of the ACA have done far more damage to Obamacare than Ted Cruz, Paul Clement, Michael Carvin, and Michael Cannon combined. I could write an entire book on it… Speaking of which, blogging will be lighter than usual this month. My manuscript for Unraveled is due in January, although I will have an opportunity to add a bit after Zubick is decided before it goes to press. Details coming soon.