The House of Representatives is considering a bill to permanently do away with "Obamacare's" "Cadillac tax," a tax on very generous employer-sponsored healthcare plans.

But the Cadillac tax is actually good policy and can help to fight rising healthcare costs.

The Cadillac tax is also a progressive way to raise revenue.

Scott Eastman is federal research manager at the Tax Foundation, where he coordinates research production for the Center for Federal Tax Policy.

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Even for taxes, the "Cadillac tax" is an unpopular vehicle.

Established in 2010 by the Patient Protection and Affordable Care Act (also known as "Obamacare"), the Cadillac tax's implementation has been delayed twice. Now a large bipartisan group in Congress supports legislation that would end this excise tax on high-cost health-insurance plans once and for all.

This is unfortunate because the Cadillac tax is good tax policy. The tax would limit the income tax's exclusion for employer-sponsored insurance, which encourages overconsumption of healthcare services and contributes to rising health-insurance costs. What's more, the tax would generate revenue in a progressive way by taxing mostly high-income people.

Most people won't pay the tax

The Cadillac tax is a 40% excise tax on the value of health-insurance benefits beyond certain dollar values. In 2022, when the tax is scheduled to be enacted, $0.40 would be taxed of every dollar of health-insurance benefits provided to employees beyond $11,200 for individuals or $30,150 for families.

If that seems expensive, that's because it is. Most insurance plans cost much less than this. According to Kaiser Family Foundation's 2018 Employer Health Benefits Survey, the average cost of an employer-sponsored health plan in 2018 was $6,896 for individuals and $19,616 for families.

The Cadillac tax would reduce the number of people who select high-cost health-insurance plans by making these pricey plans even more expensive. All other things being equal, consumers of high-cost health insurance would look for less expensive plans, reducing healthcare costs.

This is exactly the reason why the Cadillac tax was established. Without the Cadillac tax, our tax code will continue to provide an unlimited subsidy for employer-sponsored health insurance. Employer-sponsored insurance benefits are excluded from an employee's income, while employers get to deduct the cost of these benefits from their own income. This means employer-sponsored health-insurance benefits go untaxed.

This is in stark contrast to wages, which are taxed by both the individual-income and payroll taxes.

This difference is problematic because it encourages employers to provide overly generous healthcare benefits in lieu of wages. The tax code should not subsidize one form of compensation over another because this type of unequal tax treatment can lead to inefficiencies.

Case in point, this exclusion supports our system of employer-provided health insurance. Employer-provided health insurance is not bad on its face, but it can contribute to rising healthcare costs by insulating consumers from the direct cost of their healthcare decisions.

The tax is a progressive way to raise revenue

More than that, the exclusion of employer-sponsored health benefits is really expensive.

The US Treasury projects that, from 2019 to 2028, this tax break will cost the federal government almost $3 trillion in revenue, with the majority of benefits going to high-income taxpayers. This is because high-income people are more likely to have insurance through their employers, and the exclusion's benefits increase with a taxpayer's income because of our progressive tax system.

Now, the Cadillac tax is not perfect.

For instance, policymakers could have directly capped the number of health-insurance benefits employees are allowed to exclude from their taxable income. Instead, they opted to create a new tax that would be levied on health-coverage providers but paid for by employees.

It's also possible the proportion of "high-cost" health-insurance plans subject to the tax will grow over time as a result of "bracket creep." The Cadillac tax's thresholds are adjusted for inflation, but healthcare prices tend to grow faster than inflation, and this faster growth could push more plans into the Cadillac tax's territory. So even some less generous plans may eventually become subject to the tax because of this creep.

Creating a tax to indirectly limit a tax incentive is not ideal, and bracket creep is not a transparent way to raise revenue.

But despite the provision's flaws, the Cadillac tax could help policymakers limit the exclusion for employer-sponsored insurance and raise revenue in a progressive way. Sometimes the least popular vehicles are the ones that take you the furthest.

Scott Eastman is federal research manager at the Tax Foundation, where he coordinates research production for the Center for Federal Tax Policy. Scott has a master's degree in economics from George Mason University and a bachelor's degree in political science from the University of Nebraska at Lincoln.