Save the Cadillac tax

A public option, a “pay or play” provision for employers and no taxes on health benefits.

Those were the three keystones Jim Lowe, a senior field representative with the AFL-CIO, laid out for health care reform when he spoke at an IU College Democrats meeting last Wednesday.

It was a pretty predictable prescription of policies. The public option – the plan to have the federal government offer health insurance – has become the focus of the health care debate for liberals and conservatives alike.

The “pay or play” provision, a plan to make all employers provide health coverage for their workers or pay a fine, and the possibility of taxing certain health benefits are mentioned less often.

But given Lowe’s affiliation with the AFL-CIO, it isn’t surprising he highlighted this provision that will likely benefit unions.

Forcing employers to provide health insurance for their workers and making sure health benefits from employers remain untaxed preserves a system that has long benefited unions.

Unfortunately, it is less clear that maintaining America’s unique practice of tying health insurance to employment helps anyone else. There are many reasons to think that moving people away from employer-provided insurance could help slow rising health care costs.

A tax on more expensive health insurance plans introduced in the Senate, a so-called Cadillac tax, would at least make individuals more aware of how expensive their employer provided insurance really is.

The decision of the AFL-CIO to oppose such a cost-saving measure, and the choice of many Democrats to go along with them, is a clear example of how America’s rare opportunity for health care reform is being wasted.

The reason most Americans get their health coverage from employers has nothing to do with a preconceived policy. World War II wage controls forced many employers to offer fringe benefits like health insurance to compete for workers. Those benefits essentially took the place of wages, but the practice remained after the wage controls were lifted because the benefits were untaxed.

Let’s be clear: Most economists agree that contributions employers make toward their workers’ health plans come in place of paid wages.

Workers might get some benefit from this setup in that part of their wage is tax-free, but there is no free lunch here. Even union members with some of the most extensive health care plans don’t get as much from this system as they think.

The Cadillac tax is actually targeted at insurance companies, but the costs will be passed to the employers providing the expensive plans and eventually to the employees.

The tax won’t unravel the employer-based system of health care by any means.
And while the tax would fall on the plates of plenty who aren’t rich, there is little evidence that these more expensive plans are providing any real health benefits.

Most Democrats in the House of Representatives have come out against the tax anyway.

I am still waiting to hear why we should kill another potential cost-saving policy, while passing health care legislation that supposedly pays for itself with such savings.