Who would purposefully design a legislative strategy whereby whoever wins actually loses? Congressional Republicans, that’s who.
On Tuesday evening, Republican leaders in the House introduced another continuing resolution to fund the federal government for four more weeks (through February 16). In an attempt to win Democratic votes, the bill includes a six-year extension of the State Children’s Health Insurance Program, without any of the conservative reforms congressional leaders said they would fight for back in 2015.
But when it comes to bad policy—and bad strategy—the bill’s two-year postponement of Obamacare’s “Cadillac tax” stands as its coup de grace. That tax has flaws, but represents one of the few widely accepted ways to control health care costs. That of course means Republicans, as House Ways and Means Committee Chairman Kevin Brady (R-TX) said last week, “want to get rid of it.”
Inane Tax Treatment of Health Insurance
Since an Internal Revenue Service ruling (later codified) during World War II, the federal government has excluded health insurance and other fringe employment benefits from both payroll and income taxes. Economists on all sides of the political spectrum agree that this exclusion encourages workers to over-consume health insurance, and thus health care.
Taxing wages but not health benefits encourages firms to offer more generous benefits—with lower deductibles, co-payments, and so forth—and that lower cost-sharing encourages people to consume extra health care. (“I’m not sure how sick I really am, but because I only have a $10 co-pay, I might as well go to the doctor and find out.”)
Obamacare attempted to change that dynamic through its “Cadillac tax” on “high-cost” employer plans. The tax applied for every dollar of benefits provided over a defined amount, encouraging firms to make their benefits less rich, to avoid exceeding the threshold that would trigger the tax.
However, the tax has two noteworthy flaws. First, it would impose a 40 percent rate of taxation for every dollar by which plans exceed the threshold—a rate double that paid by middle-income workers, and higher than even the highest marginal income tax bracket paid by the very wealthy. Second, the “Cadillac tax” increased net revenue, as Obamacare raised taxes overall to pay for its new entitlements.
As for the Bad Strategy
However, Republicans could easily remedy the “Cadillac tax’s” flaws with another alternative. The alternative could limit the tax preference for employer-provided health insurance—without a punitive 40 percent tax rate, and while not raising any additional revenue over a decade. President George W. Bush proposed this concept more than a decade ago, and the Republican Study Committee and others have since endorsed it.
However, repealing the “Cadillac tax” outright would effectively sabotage any ability to reform or replace it. As with Obamacare’s Independent Payment Advisory Board (IPAB), removing a constraint on health spending now with the intent of replacing it later would almost certainly mean that “later” will never arrive. That of course means Republicans, consistent with their insatiable desire to postpone difficult decisions, want to repeal both the “Cadillac tax” and IPAB without constructing replacements.
Tuesday evening’s spending bill would postpone the “Cadillac tax”—already delayed once, until 2020—for another two years, until 2022. It would likewise suspend Obamacare’s medical device tax for two years, and its health insurer tax for one year. It would also exempt these changes from the Statutory Pay-As-You-Go Act, which requires offsetting spending cuts to fund this tax relief—because heaven forbid Congress be forced to reduce spending.
In Obamacare’s “Cadillac tax,” Republicans face a policy, albeit one with flaws, that will actually reduce health care spending, and one they can rightly blame on Democrats. That they seem adamant on ending this tax, and pulling defeat from the jaws of victory, speaks volumes to their near-sightedness in both policy and strategy.
Mr. Jacobs is founder and CEO of Juniper Research Group, a policy consulting firm based in Washington. He is on Twitter: @chrisjacobsHC.