Repeal of excise tax would benefit middle- and upper-middle income employees

If the Cadillac tax were repealed, the average tax cut would increase with income, with middle- and upper-middle income taxpayers would receive the largest share of the tax benefit, compared with the shares of after-tax income, according to a report by the Urban Institute and Brookings Institution’s Tax Policy Center. The report analyzes how the repeal would affect taxes independent of how the generosity of plans by wage level would change in the event of repeal.

Cadillac Tax. Under Section 9001 the Patient Protection and Affordable Care Act (ACA), employee sponsored health benefits with values exceeding certain thresholds will be subject to an excise tax, the so-called Cadillac tax, starting in 2018. The tax will equal 40 percent of the value of health benefits exceeding $10,200 for an individual and $27,500 for family coverage. The thresholds will grow in subsequent years.

Insurance companies will be charged for the tax, but the burden will likely fall on workers in the form of higher premiums or reduced wages. Employers can avoid the tax by choosing less expensive plans, increasing wages and workers’ income and payroll taxes. The Joint Committee on Taxation and the Congressional Budget office estimate that 75 percent of the revenue raised by the Cadillac tax will be through higher income and payroll taxes, rather than from the tax paid by insurers.

Effects of repeal. Come 2018, the average tax liability would barely change when the Cadillac tax begins, and by 2025, it would only reduce taxes modestly. Middle-income and upper-middle income taxpayers would benefit most, but the tax cuts would not exceed a few hundred dollars. The report analyzes two scenarios to determine which income groups would benefit most from a repeal of the tax. One scenario, under which premiums would first fall to avoid the tax, then stay below the tax threshold even after the tax is removed, the average tax cut would be only $34. The second scenario shows taxes reverting to pre-Cadillac tax levels, with middle- and upper-middle income taxpayers receiving larger shares of the tax cut from repeal than their shares of after-tax income under the current law.


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