After a long-week of negotiations, unions have won an exemption from the excise tax on high-cost “Cadillac” health insurance plans. The excise tax would fall on health insurance plans that cost more than $8,500 for individuals and $23,00 for families (the union deal reportedly slightly increases these thresholds) starting in 2013. It is one of the many tax hikes proposed by Congress to partially offset the cost of its take over of the health care system.
Under the terms of the deal cut between Congressional negotiators, union leadership and the White House, union members would not have to pay the tax until 2018 – although this could be extended in the future and further delay union members from paying the tax. This latest deal for a special interest further demonstrates that the push for health care reform has always been about politics – not the best policy for the American people.
If it had been about setting the right policy, Congress would have capped the unlimited income tax exclusion for employer-provided health insurance. A cap would have been the right decision from both a health care and tax policy perspective, but President Obama assailed it during the campaign. The excise tax is an inferior, roundabout way of capping the exclusion without explicitly doing so.
Excluding union members from the excise tax is grossly unfair for non-union workers left paying it. For instance, two workers at the same company, one in the union and one not, that have identical health insurance plans would end up paying significantly different amounts of tax. The tax is 40 percent on the value of health plans in excess of the levels described above. The union worker would not pay this hefty tax, but the non-unionized worker would. There is no policy justification for exempting the union worker. They would get the exemption because they have powerful representation in Washington. Non-unionized workers would pay it because they don’t.
The tax code is already monstrously complex and the union carve-out from the tax will only make it worse. Tax authorities, taxpayers and employers will need to determine which workers are subject to the tax and which get a free pass based on union membership. They will also have to strip out the portions of the plans that cover dental and vision benefits since the new deal exempts them from the tax. This will add a new set of complicated paperwork for everyone to deal with.
Their exclusion from the tax means that Congress will need to find additional revenue to replace the revenue the tax would have raise had it applied to union members. This most likely means a further increase of the payroll tax, and applying it to investment income for the first time, for taxpayers earning more than $250,000 a year. This tax increase will hurt those that earn much less by lowering investment. Lower investment will mean businesses will create fewer jobs and wages will be lower for workers.
The backroom deal to exempt unions from the excise tax is a bad deal for any taxpayer that is not in a union. And not only will union members not have to pay the tax, but unions will get an extra benefit because they will have a new selling point to pitch potential members and help swell their ranks: join the union – get a tax cut.
This latest backroom, sweetheart deal for a special interest should anger all taxpayers. Even if they aren’t impacted by this particular deal, unless they have powerful friends at the negotiating table, they could be on the chopping block next. Business as usual in Washington.