Next target: tax breaks for employer plans

Employer and business groups are shifting their lobbying efforts from repealing the Affordable Care Act's unpopular “Cadillac” tax to fighting GOP proposals to chip away at the tax break on employer-provided health insurance.

Capping the tax break, they say, would cause employers to offer skimpier benefits, and some would stop offering coverage altogether. That would erode the employer-sponsored health insurance market, where 178 million Americans get their health coverage.

But mentions of tax reform led by a GOP-controlled Congress has opponents gearing up for their biggest and potentially most expensive battle yet. In the last two weeks, leaked drafts of the House Republican bill to repeal the ACA showed lawmakers plan to cap the tax breaks on employer-sponsored health insurance to pay for the replacement healthcare law. It would be the single source of revenue to pay for the new age-based tax credits that would replace the ACA's subsidies.

Capping the tax break is “not a policy that's good for workers and not a policy that's good for employers,” said James Gelfand, senior vice president of health policy for the ERISA Industry Committee, a lobbying group for employee benefit issues.

But the idea of capping the tax break, or doing away with it entirely, is a favorite GOP tax reform strategy that's been floated several times since the 1980s. Today both employers' and employees' contributions to the cost of health insurance are excluded from federal income and payroll taxes. That's a major incentive for employers to provide insurance. But employers argue that taxing health benefits would require them to scale back on the benefits they offer, pass more costs onto employees, or even quit providing insurance.

“Why would an employer want to pay for the health benefit if the government is willing to pay” with a tax credit? Gelfand asked.

If employers drop health benefits, the employer-sponsored market could lose its stability, cap opponents say. And while the proposal to cap the exclusion aims to hit overly generous health plans, plans with older workers or those in states with more expensive healthcare could exceed the threshold even if their health plans aren't generous, said James Klein, president of the lobbying group American Benefits Council.

On the other hand, health economists largely support limiting the tax break, since the unlimited subsidy gives consumers less reason to care about the cost of healthcare. Consumers with generous health benefits spend more and drive up healthcare costs, which leads to higher insurance costs in the long run, said Martin Gaynor, an economist at Carnegie Mellon University.

Responding to the threat to the status quo, the American Benefits Council's Alliance to Fight the 40, a coalition of big employers, business groups and unions—including companies such as insurer Cigna Corp., Exxon Mobil, and American Airlines—launched a new campaign to lobby against proposals to limit the tax breaks on employer-provided insurance. The coalition was initially formed to fight the ACA's Cadillac tax—a widely loathed 40% excise tax on the value of employer-based health premiums that exceed specific thresholds.

The Council of Insurance Agents & Brokers, a trade group representing commercial insurance and employee benefits brokers, is also urging the Trump administration to preserve employer-provided benefits' tax-exempt status. The group spent $330,000 in the fourth quarter of 2016 to lobby Congress and the federal government on preserving the tax exclusion and nixing the Cadillac tax. Since last April, the lobbying group has spent $1 million on the issues, disclosures show.

It's unclear where health insurers will throw their support. Insurers such as Cigna and the Blue Cross and Blue Shield Association fought the Cadillac tax, so it's likely they will oppose the cap. Both mechanisms encourage employers to offer less generous coverage. The Alliance of Community Health Plans, which represents not-for-profit insurers, hasn't taken a side because it's waiting on specifics. America's Health Insurance Plans, the insurance industry's largest trade group, did not respond to requests for comment.

The tax-free status of employer health benefits dates back to World War II, when the federal government imposed strict wage and price limits to control inflation and prevent changes that could disrupt the workforce.

To get around those wage controls, employers began offering health benefits to employees as a form of untaxed compensation. The rest is history. Employer-sponsored health insurance became standard. Employees now expect health benefits and businesses rely on good benefit packages to attract and retain the best talent. Not only that, employers are able to offer this tax-free benefit in lieu of raising wages.

Today, employer-provided insurance receives the single-largest federal tax break, estimated at more than $250 billion in 2016, according to the Congressional Budget Office.

Given that lofty figure, it's not hard to see why there have been many attempts to axe the tax break. President Ronald Reagan in 1983 proposed limiting the value of employee health benefits that could be considered tax-exempt, but the proposal was dropped when the Tax Reform Act of 1986 was passed. Just like today, the “tax cap” proposal was met with fierce opposition from employer groups and labor unions that feared disrupting the status quo in any way would erode the employer-sponsored benefit system.

President George W. Bush in 2007 also sought to do away with the unlimited tax exclusion and provide individuals with a standard deduction for health insurance. He argued that would encourage more people to join the individual market, which would bring premiums down. The Obama administration also considered shaking up the tax exclusion to pay for expanding coverage under his healthcare law.

Ultimately that didn't happen, and the ACA's Cadillac tax was born as a sort of middle ground. The Cadillac tax was supposed to go into effect in 2018 but was delayed until 2020 thanks to opposition from employer and labor groups. Groups such as the Alliance to Fight the 40 are still battling the tax, but observers assume it will go away with ACA repeal.

The revenue that would have been raised by the Cadillac tax could be replaced by capping the tax break on employer-provided health insurance. There's no shortage of support for a cap within the GOP: In his June 2016 paper, A Better Way, House Speaker Paul Ryan proposed capping the exclusion “at a level that would ensure job-based coverage continues unchanged for the vast majority of health insurance plans.” He argued the unlimited tax break holds down workers' wages and unfairly benefits the wealthy.

The ACA replacement plan proposed by HHS Secretary Tom Price when he was a Georgia congressman—the Empowering Patients First Act—put a tax exclusion cap at $8,000 for single coverage and $20,000 for family coverage.

The House Republicans' leaked drafts of the ACA replacement would limit the tax break to the 90th percentile of current group health insurance premiums. Benefits above that threshold would be taxed. While the ACA replacement plan isn't finalized, given the GOP support for the cap it wouldn't be a surprise to see a change to the tax exclusion in the final draft.

If employers' response to the leaked drafts is any indication, the Trump administration can be sure that pushing the cap on the tax break through will be an uphill battle.

Employers aren't about to trade the Cadillac tax for a cap on the tax break. To employers they're the same thing, Gelfand said, adding that lawmakers should expect “strong pushback from the employer community.”