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Angie Drobnic Holan
By Angie Drobnic Holan October 21, 2009

Left-leaning group opposes excise tax on 'Cadillac' plans as a hit to the middle class

Unions are usually supporters of the Democratic plans for health reform, but there's one thing they don't like: an excise tax on high-dollar health care plans, popularly known as "Cadillac" plans.

Health Care for America Now, a coalition that includes unions, has launched an ad attacking the excise tax, which was included in a version of health reform authored by Sen. Max Baucus and approved by the Senate Finance Committee on Oct. 13.

Here's what the ad says: "We all know America needs real health care reform, but there's a right way and a wrong way to pay for it. Some senators say they want to tax so-called 'Cadillac' health care plans, but those proposals will also tax the benefits of millions of middle-class workers. There's a better way. Let's ask individuals making more than $250,000 to pay their fair share."

We're checking the facts behind the text that flashes on the screen during the ad: "40% tax on health care benefits of middle-class workers."

The excise tax works in a roundabout way. Under the Senate Finance proposal, insurance companies would have to pay a 40 percent excise tax on health insurance policies that exceed $8,000 for individuals and $21,000 for families. We spoke with three economists on both the left and the right, and they all agreed that insurance companies will not simply absorb the new tax; they will pass it along in the form of higher premiums. Employers will then try to avoid the new higher costs by buying cheaper health plans.

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Finally, the economists agreed that if employers have to scale back on health plans, they will eventually pay higher wages as they seek to retain workers. At this point, disgruntled workers may say "Yeah, right," but the economists were adamant that it is the case. Those higher wages are taxable, and that's how it becomes a tax increase for workers. An analysis from the Joint Committee on Taxation, which is nonpartisan and advises Congress on tax policy, confirmed this point. The Joint Committee found that many people affected by this make less than $200,000. (For more details on this Joint Committee analysis, see our report on someone else who doesn't like the excise tax: Sarah Palin .)

So here's what that means: If workers end up getting paid more, they'll also be taxed more.

Another point worth emphasizing is that the 40 percent tax is on the portion of the health plan that exceeds $8,000 for individuals and $21,000 for families. It's not on the whole plan.

We should point out here that many workers have no idea what their health plans cost. How do you know if you have a "Cadillac" plan? If you're sick of paying more and more out of pocket for health care, you probably don't have a Cadillac plan. On the other hand, if you feel like your health plan is quite generous, you might. These are plans that generally have very low co-pays and lots of extras. A Boston Globe report described one plan for state employees in New Hampshire as offering free surgery, low-cost prescriptions, free rehab for alcoholism, a stipend for gym memberships and reimbursements for yoga classes. CEOs have these types of plans, but so do some unionized workers. An economist we spoke with said they are commonly offered by state and local governments and universities, the types of jobs that are said to have "great benefits." Estimates we've looked at suggest that, by 2019, the excise tax would affect as many as 25 percent and as few as 17 percent of all tax filers.

The ad says the proposal is a "40% tax on health care benefits of middle-class workers." But that's an overstatement that fails to mention it's an excise tax that would only affect workers with health care benefits above a certain level. Most middle-class workers won't be affected at all. We rate the statement Barely True.

Editor's note: This statement was rated Barely True when it was published. On July 27, 2011, we changed the name for the rating to Mostly False.

Our Sources

Joint Committee on Taxation, Distributional effects of the excise tax in the Baucus bill, obtained by PolitiFact

Center on Budget and Policy Priorities, Excise Tax on Very High-Cost Health Plans Is a Sound Element of Health Reform , Oct. 20, 2009

Interview with Stephen Zuckerman of the Urban Institute

Interview with Paul Van de Water of the Center on Budget and Policy Priorities

Interview with Ed Haislmaier of the Heritage Foundation

Boston Globe, Healthcare overhaul could limit tax breaks on benefits , July 4, 2009

Ezra Klein, HCAN vs. the Excise Tax , Oct. 16, 2009

Health Care for America Now! Blog, No Ezra, the Excise Tax is not a "Good" Thing , Oct. 16, 2009

Communication Workers of America, Health Care Excise Tax = A Big Middle Class Tax Increase , Oct. 13, 2009

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More by Angie Drobnic Holan

Left-leaning group opposes excise tax on 'Cadillac' plans as a hit to the middle class

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