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House Democratic sponsorship of a bill repealing the “Cadillac” tax — the levy on high-cost insurance plans enacted in the Affordable Care Act (ACA) — is discrediting the party’s claim of being above craven and irresponsible tax-cutting.

At enactment in 2010, the tax was supposed to go into effect in 2018, but it has been delayed twice by Congress and is now scheduled to take in 2022 — a full eight years after implementation of the ACA’s major benefit expansions. The tax requires employers sponsoring high-premium insurance plans to pay an additional 40 percent penalty on costs above specified dollar thresholds. Separate limits apply to individual and family coverage.

On July 17th, the House passed H.R. 748, the repeal bill, by a vote of 419 to 6, with only three Democrats and two Republicans voting in opposition (Justin Amash, an independent who left the Republican party, also voted against it). There is bipartisan interest in the Senate in passing repeal too.

The push to get rid of the Cadillac tax is short-sighted for both parties, but particularly for the Democrats. The tax was instrumental to the successful enactment of the ACA, as it allowed the Obama administration and the congressional authors of the law to argue they were passing a fiscally responsible bill. It was also one of the very few serious cost-control provisions in legislation that otherwise was focused on expanding Medicaid and providing subsidies for enrollment in private health insurance. Abandoning the Cadillac tax (along with the Independent Payment Advisory Board and the CLASS Act) confirms what many critics said at the time of enactment, which is that the law’s entitlement spending commitments would prove to be irreversible while the promised offsets and cost-cutting were illusory or politically vulnerable.

The Congressional Budget Office (CBO) believes the Cadillac tax will have both direct and indirect effects on federal revenue if Congress allows it to take effect. Some employers would be unable to avoid crossing the thresholds and will therefore pay the penalty. Others will cut their health costs and stay under the premium limits. When employers cut their health benefits, CBO expects the government will still receive more tax revenue because firms, to remain attractive to workers, will need to shift what they were planning to spend on health coverage into cash compensation. Unlike health benefits, wages are subject to both payroll and income taxation.

In its estimate of H.R. 748, CBO projects that Cadillac tax repeal would reduce federal revenue by $200 billion over the period 2019 to 2029, with more than half of the lost revenue occurring in 2027 to 2029. Over the period 2025 to 2029, the annual tax cut would grow in size at an average annual rate of 18.7 percent.

The tax produces a growing stream of revenue because of its design. The thresholds triggering the 40-percent levy — expected to be $11,200 for single coverage and $30,150 for family policies when initially implemented — are indexed in the years after 2022 to consumer inflation, while premiums for insurance coverage will grow commensurate with health-care costs. In CBO’s long-term projections, consumer inflation is expected to grow at a rate of 2.4 percent annually while private-sector health costs will grow at a rate that begins at 1.8 percentage points above per capita GDP growth (CBO refers to this factor as “excess cost growth”). In its long-range forecast, CBO gradually reduces the excess cost growth of private health spending down to one percentage point above per capita GDP growth, or 4.4 percent annually. As the years pass, more and more employers will find their plans nearing the premium thresholds, thus forcing them to cut their costs or pay the tax.

Because the tax thresholds grow only with consumer inflation, the revenue loss from repeal would be substantial in the years after 2029. For instance, if the growth in revenue from maintaining the tax is assumed to be 8.0 percent annually beginning in 2030, then the 30-year cost of repeal will reach $1 trillion, in present value terms (this is based on a discount rate of 4.0 percent — CBO’s forecast of the annual yield on 10-year Treasury notes).

CBO has identified the Cadillac tax as one important reason that federal revenue collection is projected to grow from 16.5 percent of GDP in 2019 to 19.5 percent in 2049. Indeed, by 2049, the added revenue from the Cadillac tax accounts for just under one percent of GDP, or a little more than $200 billion in today’s dollars. The revenue from the Cadillac tax is roughly equivalent in 2049 to the added receipts that would be collected if the 2017 tax cuts are allowed to expire as planned after 2025.

Democratic support for Cadillac tax repeal, with no offsetting tax hikes or spending cuts, undermines the party’s claimed preference for restoring the pay-as-you-go budget rule. Under paygo, tax cuts and entitlement spending increases must be offset to avoid automatic (and blunt) cost-cutting. With the passage of H.R. 748 in the House, Republicans can now argue that the Democrats have no standing to preach about the supposed fiscal recklessness of unfinanced tax cuts. When examined over the long-term, repeal of the Cadillac tax is likely to be one of the largest tax cuts on record.

Full repeal is not the only option. Democrats could modify the tax, perhaps by working with willing Republicans on a sensible alternative. Among other things, the tax could be redesigned to be more progressive, by applying higher tax rates to rich benefit plans enjoyed by higher income households. Further, the indexing of the thresholds used to apply the tax could be adjusted to scale back its effects on employer plans. Under current law, the average employer plan is likely to have premiums for family coverage that exceed the Cadillac tax limits by 2035. The revenue lost from scaling back the tax could be offset with other health reforms, including changes to promote stronger competition in the Medicare program.

The Cadillac tax is vulnerable because it has no constituency. Employers despise it, as do workers. The only reason to leave it in place is because it would work.

Unfortunately, that does not appear to be a convincing argument for Democratic leaders in Congress. They invented this tax but are now walking away from it to appease powerful constituencies. That is a mistake. If the Cadillac tax is repealed, the government will have less revenue to pay for the spending programs many in the party want to expand. And Republicans will be able to say that it was the Democrats, not them, who paved the way for this particular trillion dollar tax cut.

James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.

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