Cash instead of Cadillacs

ObamaCare’s Cadillac tax is quickly becoming a 2016 campaign issue. The law imposes a 40 percent excise tax on the most expensive — and generous — health insurance plans offered by employers starting in 2018. The tax aims to control healthcare costs by deterring employers from offering these kinds of plans, which insulate consumers from health costs and therefore drive up spending.

Though conservatives have long railed against it, liberal candidates for president are increasingly joining them in calling for repeal. At the urging of organized labor, Bernie Sanders and now Hillary Clinton now support repealing the tax, a key revenue source for ObamaCare’s coverage provision.

In the premier episode of Vox’s excellent new podcast, “The Weeds,” Sarah Kliff and Ezra Klein question one of the Cadillac Tax’s key justifications. We presume that employers typically allocate resources with a set pool of money to set aside for total employee compensation. This money is then divvied up between wages and in-kind benefits, like health insurance. So when health insurance costs rise, there’s less money available to give workers pay raises.

But policymakers have also assumed that the opposite is true: that if an employer is spending less on benefits, they will direct those savings toward increasing wages. But this is a big assumption, as Klein and Kliff point out. There’s little evidence in research or simple common experience to suggest that this is true. If an employer limits the generosity of its health benefits because of the Cadillac Tax, it might pocket those savings as profits, pay out higher dividends, or redirect these savings into other investments. This would be entirely consistent with an unequal economy where workers are increasingly cut out of a fair share of rising profits.

However, it seems that this analysis largely depends on what types of employers are going to be most affected by the Cadillac Tax. That is, which employers are offering generous health plans that will face a 40 percent excise tax in 2018?

The tax largely appears to affect two different groups of people: (1) highly compensated executives and finance professionals, and (2) middle-class unionized workers. ObamaCare’s proponents pitched the Cadillac Tax as a tax on the first set of people: politically expedient revenue sources in the one percent. For instance, David Axelrod sold the tax as “an excise tax on high-end health care policies like the ones that executives at Goldman Sachs have.”

Few tears would be shed if executives and financiers lose out on uber-generous insurance plans. But the teachers, autoworkers, and other unionized workers in the second group are a much more sympathetic and politically sensitive constituency. Few politicians — particularly Democrats — are eager to impose taxes or raise costs on average middle-class Americans.

Which is why the political bargain at the core of the Cadillac tax is so important. Policymakers have promised these workers that they’ll be compensated for lost benefits with increased wages. So if the Vox team is right that this trade is hardly a guarantee, then that’s a big deal.

But it also seems possible to me that, in the short term at least, these worries are misplaced. The employers that are offering high-cost Cadillac plans to blue-collar and middle-class workers tend to be those with highly unionized workforces. They began offering Cadillac plans in the first place because of pressure from the negotiating power of unions.

So if these plans are jettisoned, workers at these firms are thus also the ones best positioned to ensure that their employers’ savings are actually rebated to them. At the bargaining table, organized labor groups would undoubtedly insist that employers compensate their workers for these reduced benefits through higher wages or other benefits.

During the Vox discussion, Matt Yglesias points out that the compensation structure for public school teachers is sticky and subject to lock-step contractual agreements.  But if teachers’ unions know that the Cadillac tax will be jeopardizing their bargained-for benefits in 2018, then they can (and should) call for renegotiation of these contracts in anticipation to secure replacement salary increases.

Thus, while it might be true that we have no idea if employers generally would pass health insurance savings on to workers through higher wages, it does seem reasonably likely that the employers affected by the current Cadillac tax would do so.

There are caveats to this, of course. The Cadillac Tax is designed to reach more and more insurance plans as health insurance costs rise. By one estimate, it could affect 40 percent of employers by 2028. This would affect far more than just the financial elite and the unionized workforce.

But for its immediate impact in 2018, the Cadillac tax might work out as policymakers have promised. Unions are among the most vociferous opponents of the Cadillac tax, so it stands to reason that their members have the most to lose. But they are also the workers best positioned to ensure that employers hold up their end of the bargain: reduced insurance benefits in exchange for higher pay.