During consideration of the Patient Protection and Affordable Care Act (ACA; P.L. 111-148 , as amended) proposals to limit the amount of benefit excluded from tax under this provision were addressed. The final bill did not limit the amount of benefits employees can exclude from income and payroll taxes, but it did include a related provision that is popularly termed the Cadillac tax . This provision imposes an excise tax on the cost of ESI coverage that is in excess of a predetermined threshold. 114-113 ). It is imposed on the coverage provider, either a third-party insurer or, in the case of self-financed plans, the plan administrator (which may be the employer). This tax rate is applied on a tax-exclusive basis , as is generally the case with excise tax rates. That is, like a sales tax, it applies to the price or cost excluding the tax. By contrast, the tax rate relevant to an income tax exclusion is on a tax-inclusive basis : it is applied to a base that includes the tax. As noted, the Cadillac tax was originally nondeductible from the insurer's gross income (or the employer's gross income, in cases where the employer self-insures). Deductibility was allowed in the Consolidated Appropriations Act, 2016. The Cadillac tax was originally to take effect in 2018. The Consolidated Appropriations Act delayed the effective date to 2020. The tax is projected to be imposed on plans that cost more than $10,800 for single health plans and $29,100 for non-single (e.g., family) plans. The exempt amount is indexed for inflation, and, because health costs tend to grow faster than inflation, the share of premiums covered by the tax and the revenue collected is expected to grow. (The threshold was indexed for health care costs for 2019, however.) This report examines several issues. It evaluates the potential of the Cadillac tax to affect health insurance coverage and, therefore, the health market. It also examines the expected incidence (burden) of the tax—that is, which group will pay the price of the tax. In addition, the report discusses the efficiency of the tax in the context of administrative cost. Estimated Effects of the Tax on Health Care Prices and Quantities

The Cadillac tax will affect the overall medical care market by effectively reducing government subsidies for health insurance and therefore reducing insurance coverage, which would likely lead to an increased cost of medical care for the consumer. This decline is estimated to range from 1.9% to 2.2% in 2025. Prices could fall by up to 1.3% in 2025, although costs to some consumers would increase as the Cadillac tax reduced the subsidy for health insurance. Overall expenditure (the sum of the fall in quantity and the fall in price) could decline by 2.2% to 3.2% in 2025. In other words, the tax could result in a gross reduction of $47.6 billion to $69.2 billion in national health expenditures covered by private insurance by 2025, based on the same CMS baseline projections of health spending mentioned above. These higher wages would be subject to income and payroll taxes. Effects of the Tax on Wages
The Cadillac tax will be applied as a tax-exclusive rate and imposed at a rate of 40%. Although the transmission mechanism of the economic burden of the Cadillac tax might be different in these two cases, the ultimate effects are equivalent: employees bear the economic burden of the Cadillac tax in the form of lower wages (for those that retain plans subject to the Cadillac tax) or taxes on the increase in taxable compensation (for those that forgo plans subject to the Cadillac tax).
The Patient Protection and Affordable Care Act (ACA; P.L. 111-148, as amended) included a provision to impose an excise tax on high-cost employer-sponsored insurance (ESI) coverage beginning in 2018 (recently delayed until 2020). This provision, popularly termed the Cadillac tax, imposes an excise tax on ESI coverage in excess of a predetermined threshold. The tax is imposed on the coverage provider, typically the health insurance provider or the entity that administers the plan benefits.
Currently, employers' spending on ESI coverage and most employees' contributions to ESI plans are exempt from income and payroll taxes. Although proposals to limit the amount of health insurance benefits eligible for this exclusion were considered, the ACA, as enacted, did not limit the exclusion for employer-provided health insurance coverage. The Cadillac tax discourages high-cost employer health plans through another approach.
The Cadillac tax is imposed at a rate of 40%. This tax rate is applied on a tax-exclusive basis, as is generally the case with excise tax rates. That is, like a sales tax, the rate applies to the price or cost excluding the tax. By contrast, the tax rate relevant to an income tax exclusion is on a tax-inclusive basis: it is applied to a base that includes the tax. The Cadillac tax was originally nondeductible from the insurer's gross income (or the employer's gross income, in cases where the employer self-insures), but deductibility was allowed in the Consolidated Appropriations Act, 2016 (P.L. 114-113).
The Cadillac tax was originally to take effect in 2018. The Consolidated Appropriations Act delayed the effective date to 2020. The tax is projected to be imposed on plans that cost more than $10,800 for single health plans and $29,100 for non-single (e.g., family) plans. The exempt amount is indexed for inflation, and, because health costs tend to grow faster than inflation, the share of premiums covered by the tax and the revenue collected is expected to grow. (The threshold was indexed for health care costs for 2019, however.)
This report examines several issues. It evaluates the potential of the Cadillac tax to affect health insurance coverage and the health care market. It also examines the expected incidence (burden) of the tax—that is, which group's income will be reduced by the tax. Finally, the report discusses implications for economic efficiency in the context of tax administration.
Estimates suggest that the Cadillac tax could lead to an overall decline in the quantity of health services financed by private insurance as some firms reduce the size of their insurance coverage. This decline is estimated to range from 1.9% to 2.2% in 2025 (a year for which data are available to project effects). Prices could fall by up to 1.3% in 2025 (although costs paid by some consumers could rise due to cutbacks in Cadillac plans). Overall expenditure (the sum of the fall in quantity and the fall in price) could decline by 2.2%-3.2% in 2025. In other words, the tax could result in a gross reduction of $47.6 billion-$69.2 billion in national health expenditures paid by private insurance in 2025.
Although the tax is imposed on insurers or employers, the burden is expected to fall on wages. In some cases, employers will retain the Cadillac insurance plans and pass the tax on to workers in the form of lower wages. In other cases, employers will substitute taxable wages for insurance coverage in excess of the threshold, and employees will be subject to income and payroll taxes on those wages. Revenue projections assume the latter situation will be more common.