Research & Commentary: The ‘Cadillac Tax’

Published August 5, 2015

Since its inception, the Affordable Care Act (ACA) has been plagued by legal, financial, and technological problems, many of which remain unaddressed. One of the issues looming on the horizon in 2018 is the so-called Cadillac tax, a 40 percent non-deductible excise tax on employer-sponsored health plans with annual premiums exceeding $10,200 for individuals or $27,500 for a family. According to its creators, the tax has three goals: finance ACA, reduce overall health care costs, and decrease the unequal tax benefit for employer-based health insurance plans. 

Under ACA, insurance companies and self-insured firms must pay the tax. Many critics say the cost is likely to be passed on to other employers in the form of higher premiums. The effect of the excise tax is made worse by its lack of deductibility as a business expense. Insurance providers paying the tax must assume a new health care tax burden without the income tax deductions they currently receive. The tax is broad and imposed even on income set aside in flexible spending accounts, health reimbursement accounts, and health savings accounts.

Employer-provided health benefits have not been taxed for decades. This excise tax could make plans unaffordable and drive insurers to stop selling them. The term “Cadillac” is misleading. Although the original goal was to apply the tax only to extremely high-end executive plans, it is likely to be levied on plans that are far from elite. 

Health care experts predict the majority of employers could eventually face this tax. As overall health care and insurance costs grow, more and more plans will be subjected to the 40 percent tax each year. A survey conducted by Mercer estimates one-third of employers will be hit by the tax in 2018, possibly increasing to 60 percent by 2022. Some areas of the country with older populations could be hit even harder by the tax. 

Heartland Institute Senior Fellow Greg Scandlen agrees the tax preference for employer-sponsored plans needs to be addressed, but he says the excise tax is poorly constructed and unfair. “While the tax treatment of employer-sponsored health plans certainly needed to be addressed, slapping a 40 percent tax on any plan exceeding an arbitrary dollar amount is clumsy, unfair, and counterproductive,” Scandlen told Health Care News for an August 2015 story. 

The Washington Policy Center recently released a study examining how the Cadillac tax will affect local governments, public employees, and local taxpayers. The researchers found local taxpayers could face a large tax increase once the Cadillac tax begins. They conclude governments will have only two options: Reduce health care benefits for their public employees or pass the cost of the federal tax on to local taxpayers. 

This tax will place a substantial financial burden on state and local governments, which could force significant tax hikes and make funding local services more difficult. Public-sector employees will suffer more than most. According to a Pioneer Institute study, over a 10-year period, from 2018 to 2028, a police officer in Massachusetts will be subjected to an extra $53,907 in new taxes and a teacher with an individual insurance plan would will pay an extra $20,807. 

The Affordable Care Act has continually proven to be anything but affordable. It is expected to cost Americans more than $1 trillion in new federal taxes over the next 10 years. The Cadillac tax could add billions more in new state and local taxes while negatively affecting more health insurance policies every year. States will either have to raise taxes or reform their health care plans for state workers by increasing worker contributions, scaling back coverage, or limiting benefits. 

The following documents examine health care reform and the Cadillac tax in greater detail.

Ten Principles of Health Care Policy
This pamphlet in The Heartland Institute’s Legislative Principles series describes the proper role of government in financing and delivering health care and provides reform suggestions to remedy current health care policy problems. 

How Obamacare’s “Cadillac Tax” Will Affect Local Governments, Public Employees, and Local Taxpayers
Roger Stark of the Washington Policy Center examines how Obamacare’s Cadillac tax will affect local governments, public-sector employees, and local taxpayers.

Obamacare’s Excise Tax Slams Unionized Government Employees Hardest
Gene Koprowski of The Heartland Institute explains how a new federal excise tax of 40 percent on health insurance benefits, the Cadillac tax, will hit unionized government employees most harshly in 20 U.S. states. 

Obamacare’s “Cadillac Tax” Working as Planned
Kyle Pomerleau of the Tax Foundation discusses how Obamacare’s Cadillac tax is already starting to have an effect on employer-provided health insurance coverage. Pomerleau finds even though the tax does not go into effect until 2018, companies are already starting to reduce the value and quality of their high-end health plans in order to avoid the coming tax. 

‘Cadillac Tax’ the Next Big Obamacare Battle
Brian Faler of Politico reports on a mix of business groups and labor unions pushing to tee up the next big Obamacare fight: killing the so-called Cadillac tax. Faler discusses the possible effects on health care plans across the spectrum and how the Cadillac tax may affect more plans than ACA’s creators claimed. 

Obamacare Raises Costs for Feds, States, Individuals
Writing in The Heartlander digital magazine, Loren Heal reports Obamacare will increase costs for patients and states and will increase the federal deficit. Heal writes, “Proponents of the Patient Protection and Affordable Care Act (PPACA) argued the legislation would reduce costs, but analysis from policy experts and the chief Medicare actuary now reveals not only will federal costs rise, but the costs to states, insurers, employers, and most individuals – virtually all parties in the system – will also increase.” 

The Obamacare Disaster
Heartland Institute Senior Fellow Peter Ferrara dives into the details of the Patient Protection and Affordable Care Act (PPACA) and provides an entire chapter on the high costs resulting from its implementation. 

Report: Obamacare Could Increase Deficit by Over Half a Trillion Dollars
Heartland Institute Senior Fellow Benjamin Domenech examines a report by the Mercatus Center at George Mason University, which found Obamacare adds to the deficit as opposed to decreasing it, contrary to promises President Barack Obama and others made when the health care law was being debated in Congress. 

51 Changes to Obamacare … So Far
Grace Marie Turner of the Galen Institute examines the more than 51 significant changes that had been made to the Patient Protection and Affordable Care Act as of June 2015. Turner notes the Obama administration has made at least 32 of them unilaterally, Congress has passed 17 the president has signed, and the U.S. Supreme Court has made two of the changes. 


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Health Care News at, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database at 

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