Economists press Senate to save ACA's controversial 'Cadillac' tax

Calculator that says "Medicare" on it on top of money, next to bottle of pills
A group of 100 economists are asking the Senate to save the Affordable Care Act's "Cadillac" tax on high-cost health plans. (Getty Images/liveslow)

A group of 100 economists is urging the Senate not to repeal the Affordable Care Act’s (ACA's) tax on high-cost health plans but face a stiff challenge to save a levy reviled by both Republicans and Democrats.

The letter (PDF), released Monday from liberal and conservative economists to Senate leadership, comes a week after the House voted overwhelmingly to repeal the so-called "Cadillac" tax on expensive plans. The tax is needed to help curtail spending on employer-based plans, they argue.

The tax levies a 40% excise penalty on plans that reach certain thresholds and was added to the ACA as a roundabout way of addressing the tax exclusion on employer healthcare spending, which the letter calls “inflationary, inefficient and regressive.”

RELATED: 1 in 5 employers may face the ACA's 'Cadillac' tax on high-cost health plans

“The excise tax will discourage the provision of insurance that covers such a large proportion of health care spending that consumers have little incentive to insist on cost-effective care and providers have little incentive to provide it,” the letter said.

Employers would have to redesign plans to not be hit by the 40% excise tax, and as a result “cash wages or other fringe benefits will increase.”

The economists call on the Senate to not repeal, delay or reduce the Cadillac tax unless it has an adequate replacement that also targets employer-plan spending growth. But the tax has never gone into effect, having been delayed several times, with the latest delaying ending in 2022.

The tax occupies a unique place in the political landscape of the ACA. Republicans want the tax repealed alongside all of the ACA. But some Democrats, the law’s primary defenders, have also called for its repeal. A major reason is that union groups, a key Democratic constituent, vehemently oppose the tax that might affect the hefty health plans they negotiate for their members.

Economists who signed the letter include conservative economists such as Douglas Holtz-Eakin of the right-leaning think tank American Action Forum and James Capretta of the right-leaning American Enterprise Institute. Other signers include Jonathan Gruber, one of the architects of the original bill.