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'Cadillac Tax' in Health Plan Would Hit Middle Class Hard

5 years ago
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Jim Huber, 59, calls himself "a union dirt guy." He has worked in the same Maryland steel mill for 41 years, where his father and grandfather worked before him and where his son now works, too.

Huber makes a base salary of $42,000 per year as an electrician in the plant. He drives a Ford pick-up truck and lives in a row house across the street from the house where he grew up. Although he had hoped to retire from the mill years ago, a bankruptcy at his company slashed his pension by more than half. "It looks I won't get out of here until I'm 65," he said.

Huber, who is also a United Steel Workers benefits representative, said that based on the health benefits they receive, he and every worker at his plant would be hit by the excise tax on insurance companies now moving through the Senate as a part of health care reform.

"The government is going to put together a plan of health care for everyone, but they can't tax the guy that's pulling the cart." he said.

The levy has been dubbed the "Cadillac tax," but research shows it would likely affect a broad swath of Americans regardless of their income, which could indeed amount to the tax on the middle-class that President Obama promised would not happen under his administration. The tax is a growing source of anxiety for Huber and his co-workers, but also for Democrats in the House, who vow to strip the measure out of the bill in conference or consider bringing the bill down altogether.

The confusion surrounding the tax comes from its complexity and the luxury car it is named for. When President Obama first raised the idea of taxing insurance companies this summer, he framed it as one way to get Wall Street executives to pay their fair share. Obama told PBS' Jim Lehrer he wanted to target "super, gold-plated Cadillac plans." Days later, Obama's senior adviser David Axelrod told The New York Times the administration wanted to tax benefits "like the ones that the executives at Goldman Sachs have, the $40,000 policies."

At the time, Obama said he did not want the tax to hit middle-class families, but when the bill emerged from the Senate Finance Committee in September, it proposed charging insurance companies and a 40 percent excise tax for high-dollar -- but not exactly gold-plated -- plans. The bill now calls for the tax to apply to plans exceeding $8,500 for individuals and $23,000 for families, for the cost of combining health savings accounts, medical, prescription drugs, dental, vision, etc. The tax is charged to insurance companies, but it is widely assumed they would pass it on to employers.

Despite the politically powerful unions that oppose it, the tax is enormously attractive to government economists because it both raises revenue -- $149 billion over 10 years -- and should depress the rate of health care inflation by discouraging companies from offering more generous health plans. The Joint Committee on Taxation and the CBO credit the tax as the largest factor in "bending the cost curve" and cutting the federal deficit, as Senate Democrats say the bill will do.

Christina Romer, a senior economic adviser to the president, predicted in October that the tax would encourage "both employers and employees to be more watchful health care consumers." But research released last week by Mercer, an employee benefits consulting firm, showed that in addition to considering lower-cost plans, two-thirds of companies polled said they would also raise health care costs for workers through higher co-pays and deductibles, regardless of whether the employee is a CEO or a line worker at a factory.

Beth Umland, the research director for Mercer, explained that although the "Cadillac tax" is targeted at high-dollar plans, the cost of insurance plans is primarily driven by the age, gender, health and location of a company's workers, not the lifestyle they enjoy.

"Plans that trigger the excise tax are not necessarily generous plans," she said. "Small employers offer significantly less-generous plans than large employers, but just as many small employers are going to trigger the tax." Plans for workers in dangerous professions, like steelworkers, also have higher-cost plans because they experience more work-related health problems.

Umland also said that the tax would apply to about 20 percent of companies when it is implemented in 2013, and would apply to businesses large and small, union and non-union, from Goldman Sachs to the bagel shop down the street. It is also likely to have the greatest impact on those who use the most health care, like new moms and people with chronic illnesses, as well as those who can least afford it. "The lowest-paid workers tend to choose the most generous plans because they can't afford the out-of-pocket expense of a higher deductible," she explained.

Rep. Joe Courtney (D-Conn.) opposes the tax and recently described the "searing moment" six weeks ago when he realized that the excise tax would affect school teachers in his coastal Connecticut district, whose 2010 contracts include health plans well above the Senate thresholds.

"The description of this, that is was some kind of a group of Americans that were at the top strata, and that the middle class would not be affected by it, was clearly not the case," he said.

To stop the tax, Courtney drafted a "Dear Colleague" letter to oppose it and got 188 House members to sign on, including one on Monday. He said he was relieved when House Speaker Nancy Pelosi chose to pay for health reform with a "millionaire surtax" for people making more than $500,000, but he's worried about the Senate, where the Cadillac tax has showed no sign of stopping, despite opposition from Democrats and Republicans alike.

The next step for the excise tax will be a vote by the full Senate. If it is accepted, the two competing bills will be reconciled by a conference committee.

A senior Democratic House aide said this week that the choice by the Senate to pay for health care reform with an excise tax that could hit middle-class workers, as opposed to the choice of the House to tax the highest earners, represents a fundamental philosophical difference between the two chambers that could endanger the entire bill if it is a part of the final conference report.

"It would be a mistake to assume that we're just going to rubber-stamp what the Senate sends us," Courtney said. "All of us are going to be on the ballot in 2010. It certainly raises a big, red flag for people who are going out be campaigning soon."

If the excise tax passes Congress, Jim Huber said the steelworkers in his plant would be hard-pressed to pay the higher co-pays, deductibles and out-of-pocket expenses that he expects to be passed on to his fellow employees, including his son, by the company that is still recovering from its bankruptcy.

"The middle class can't afford another tax," he said. "Let them get it from the Bush folks, the 1 percent that's been enjoying the tax cuts. Get it from them."

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