The ACA Excise Tax is not a Progressive Tax Policy

Laurel Lucia

Beginning in 2020 the Affordable Care Act will implement an excise tax on “high cost” job-based health insurance—single plans with yearly premiums exceeding the equivalent of $10,200 in 2018 and family plans with premiums exceeding $27,500. This blog post is the third in a series in which I discuss the likely consequences of the excise tax policy. (See first post The ACA Excise Tax Targets Where You Live and Other Factors More than Benefit Levels and second post The ACA Excise Tax will Promote Cost Shift to Workers not Cost-Effectiveness.)

On Friday, President Obama signed a tax and spending bill that will delay implementation of the excise tax until 2020. But debate is likely to persist on whether the excise tax should ultimately be implemented as designed.

One issue that should continue to be discussed is whether or not the tax will result in more progressive tax policy. Under federal law since 1954, employer-sponsored health insurance has been excluded from taxes for both employers and employees, regardless of the income level of the employee. This is arguably a regressive policy because higher income people benefit more from the exclusion as a result of their higher income tax rates and higher likelihood of having job-based coverage. A letter by economists and policy experts argues that a goal of the excise tax is to address the regressive nature of the current deductibility of health insurance. However, the excise tax does not vary the tax treatment of health insurance based on income level—like gasoline and other excise taxes, it is a one-size-fits-all rate—nor does it change the fact that the bulk of employer-sponsored health benefits will continue to be tax exempt.

It is true that higher income workers are much more likely to have employer-sponsored insurance, the only type of health insurance subject to the excise tax. And premiums are slightly higher, on average, at firms with higher income workers, according to findings from a Kaiser Family Foundation/ HRET Survey. However, while higher income workers may be more likely to be affected by the excise tax, a large number of low- and middle-income Americans continue to rely on job-based coverage—more than 69 million Americans with family income of less than $75,000, including nearly 10 million individuals with family income of less than $25,000, according to Census data.

It is not known what share of low- and middle-income workers with job-based coverage are in plans that exceed the high cost threshold but, as I described in my first post in this series, health insurance premiums are often affected more by factors like where you live, the health of your co-workers, and the size of your firm, than generosity of benefits. Many low- and middle-income Americans have job-based plans that undoubtedly will be subject to the tax, and there are no protections for these individuals.

Arguably, in practice the effect of the excise tax will be regressive because low- and middle-income workers with high cost plans will face more severe consequences than their higher income counterparts.

In order to avoid the excise tax, many employers are likely to reduce plan value by increasing deductibles, as I discussed in the second post in this series. Low-income workers with job-based coverage could face the same level of benefit reduction as higher-income workers but have less ability to pay the higher out-of-pocket costs when they need care. Insured low- and middle-income workers are already more likely to have deductibles that could potentially use 5% or more of their income, which deems them “underinsured,” according to research by the Commonwealth Fund. Underinsured individuals are more likely to report problems getting needed care, medical bill problems, and lingering financial problems like bankruptcy or credit card debt, compared to other insured individuals. The excise tax is likely to exacerbate these challenges for low- and middle-income workers.

For employers that maintain “high cost” plans, the tax is likely to be passed down by insurers in the form of higher premiums. If employers then pass on the higher premium cost to employees, an investment banker and a hotel housekeeper with identically-priced plans would face the same tax amount, even though their incomes differ greatly (and even if the generosity of benefits varied significantly). An analysis in the American Medical Association Journal of Ethics demonstrated the inequity by showing that low-income workers with a “platinum” level plan would face a larger increase in net costs (premiums plus out-of-pocket costs minus tax exclusion) under the excise tax than high-income workers with the same plan and premium.

The excise tax is regressive because it will be applied uniformly across all workers with high cost health plans, regardless of income. In cases in which employers respond by reducing benefits, the most likely outcome, higher out-of-pocket costs will disproportionately hurt low- and middle-income workers because they are less able to afford care. To the extent that the tax is passed onto workers through higher premiums, the premium increase will have a more severe impact on low- and middle-income workers. It’s hard to see how the excise tax will achieve the goal of making our health insurance tax policy more progressive.

View the first post in this blog series:
The ACA Excise Tax Targets Where You Live and Other Factors More than Benefit Levels

View the second post in this blog series:
The ACA Excise Tax will Promote Cost Shift to Workers not Cost-Effectiveness