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Will a looming tax on so-called "Cadillac" health insurance policies equate to a "devastating" tax hike on the middle class in Kentucky? Will a looming tax on so-called "Cadillac" health insurance policies equate to a "devastating" tax hike on the middle class in Kentucky?

Will a looming tax on so-called "Cadillac" health insurance policies equate to a "devastating" tax hike on the middle class in Kentucky?

Steve Contorno
By Steve Contorno July 23, 2014

Mitch McConnell claims 'devastating' tax increase on middle class looming due to health care law

Coal and health care are the two dominant themes in Kentucky’s hotly contested U.S. Senate race.

Sen. Mitch McConnell’s campaign saw an opportunity to attack his Democratic opponent, Kentucky Secretary of State Alison Lundergan Grimes, on the second issue after a new report came out on the country’s long-term fiscal health.

"Alison Lundergan Grimes fully supports the implementation of Obamacare and the devastating tax hikes it will have on middle-class Kentuckians," McConnell spokeswoman Allison Moore said in a press release on July 17.

The press release included several links to and excerpts from a July 16 Politico story about a new report from the Congressional Budget Office. The campaign said the story was "background information highlighting" how "Obamacare implementation will hurt middle-class Kentuckians." So clearly, McConnell’s statement is linked to the findings in this study.

But did this study show "devastating tax hikes" are on the horizon for Kentucky’s middle class? Let’s take a look.

The study

The Congressional Budget Office, Congress’ top fiscal scorekeeper, released a report in July on the country’s long-term budget outlook. It raises concerns about the country’s current financial path if the status quo is maintained for the next 25 years, including about the country’s debt.

The report also looked at the country’s tax policy. One interesting line mentioned the future impact of taxes — including some in the Affordable Care Act.

"Because some parameters of the tax system are not indexed to increase with inflation, rising prices alone push a greater share of income into higher tax brackets," the report says.

What does this mean? Basically, some federal taxes kick in when you reach a certain income level. These levels are not set to increase with inflation. So in 25 years, inflation will push some people past the threshold who, in today’s dollars, would not be required to pay those taxes. Summing this up, Politico headline is "CBO: Everyone’s taxes will go up quietly."

But as you’ll see, the effect of the Affordable Care Act is much more limited than other parts of the tax code.

The Affordable Care Act and taxes

There are a couple tax levels in the Affordable Care Act that are not indexed to inflation, and therefore, over time, some people who were not paying this tax will, unless Congress makes some changes.

One is a levy on investment income for individuals who earn more than $200,000 a year. It also applies to families with incomes beyond $250,000.

You’ll notice right away that’s a pretty high watermark. A salary of $200,000 today would put an individual in about the top 5 percent of all income earners in the United States, according to the Tax Policy Center, an independent think tank. Clearly, that’s not middle class.

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But let’s play ball with McConnell and peek ahead 25 years down the road, shall we?

According to the CBO report, the median total income in 2039 will be $50,900, well below the $200,000 level to qualify. For a family of four with two parents and two children, median income will be about $146,000. Higher, but still $100,000 short of the $250,000 threshold for families.

Bob Williams of the Tax Policy Center provided us some additional projections. By his estimates, in 2039, someone making $205,000 would be among the top 20 percent of all earners.

While middle class is a loosely defined term, "you wouldn’t say top 20 percent is middle class," Williams said.

"In that sense, even there, these taxes are not likely to hit very many people in the middle class, if anybody," Williams said.

That’s especially true in Kentucky, a state with the fourth-lowest median income in the country.

In 2018, the Affordable Care Act also phases in an excise tax on the so-called "Cadillac" or high-cost health insurance policies. The premiums for these plans are paid for almost entirely by employers, and often offer generous benefits and little cost-sharing for employees.

Under Obamacare, plans that cost more than $10,200 are subject to a 40 percent tax, but only on the amount that exceeds $10,200. (Meaning if a plan costs $11,000, the insurance provider will pay taxes on $800 of it.) Those costs are likely to be passed on to employers, the CBO said.

In 2009, Sarah Palin said this tax would hit those making under $200,000 the hardest. We said that was Mostly True. At the time, however, the Affordable Care Act was still working its way through Congress and the unfinished bill taxed policies exceeding $8,000, significantly less than the final outcome. Even then, analysts said it was only expected to affect about one-in-four insurance policies in 2019. (We couldn’t find any studies that analyzed this tax in the form it was signed into law.)

It would be a stretch to call this tax "devastating." The CBO said the vast majority of employers are more likely to offer workers less expensive plans than pay the higher costs. However, the CBO and other economists said wages will increase to make up for the lost health benefits (which is a form of compensation). So those workers may pay some higher taxes on the increased income and see changes to their health care plans, but they’ll make more money as well.

One study from the Massachusetts Institute of Technology said that the increase in wages would far surpass additional taxes collected by the government. That is based on taxing at $8,000, not $10,200, but the general concept still holds, said Steve Zuckerman, a senior fellow in the Health Policy Center of the Urban Institute.

"It’s a tradeoff in compensation and slightly less generous fringe benefits," Zuckerman said. "It doesn’t seem to me it’s going to be a devastating tax increase. If anything, on balance, they’ll be paying more taxes ... but they’ll also have more take-home pay."

We took all of this to Moore, McConnell’s spokeswoman. In addition to arguing that the taxes mentioned above would, over time, affect the middle class, she also pointed out that the individual mandate requiring almost all uninsured Americans to buy insurance should be considered a tax on the middle class. In upholding the law, the Supreme Court said the mandate "may reasonably be characterized as a tax" when it upheld the law. But this is not what was highlighted by the CBO report or the Politico story the campaign cited.  

Our ruling

On the news of a new CBO report, a McConnell spokeswoman said that the implementation of Obamacare as outlined in the report would mean "devastating tax hikes ... on middle-class Kentuckians."

Mostly, this report showed how more high-income earners will have to pay taxes over time, but most of the middle class wouldn’t be affected, even 25 years from now.

The exception is the excise tax on high-cost plans. While just a fraction of plans would be affected, there are plenty of regular folks who have these types of policies. Still, they’re not likely to face "devastating" tax increases. It’s more probable that employers will provide less expensive insurance policies. Those employees will subsequently pay more in taxes, but only because their incomes will increase.

We rate the claim from McConnell’s campaign as Mostly False.

Our Sources

Press release from Sen. Mitch McConnell’s campaign, July 17, 2014

Email interview Allison Moore, McConnell spokeswoman, July 17-21, 2014

Politico, "CBO: Everyone’s taxes will go up quietly," July 16, 2014

Congressional Budget Office, "The 2014 Long-Term Budget Outlook," July 2014

Phone interview with Bob Williams, senior fellow at the Tax Policy Center, July 21, 2014

Joint Committee on Taxation, Technical Explanation of the Revenue Provisions of the "Reconciliation Act of 2010," as Amended, in Combination with the "Patient Protection and Affordable Care Act," March 21, 2010

Email interview with Frank Shima, administrative specialist for the Joint Committee on Taxation, July 22, 2014

Kaiser Health News, "'Cadillac' Insurance Plans Explained," March 18, 2010

Congressional Budget Office, "Updated Estimates of the Insurance Coverage Provisions of the Affordable Care Act," March 4, 2014

PolitiFact, "Left-leaning group opposes excise tax on 'Cadillac' plans as a hit to the middle class," Oct. 21, 2009

PolitiFact, "Sarah Palin says health care reform will raise taxes on the middle class," Oct. 21, 2009

PolitiFact, "Paul Ryan says a dozen 'Obamacare' taxes hit middle-class Americans," Oct. 2, 2012

Jonathan Gruber, "Implications of the JCT Score of the High-Cost Insurance Tax," Nov. 5, 2009

Urban Institute and Robert Wood Johnson Foundation, "Limiting the Tax Exclusion of Employer-Sponsored Health Insurance Premiums: Revenue Potential and Distributional Consequences," May 2013

Joint Committee on Taxation, Letter to Sen. Jon Kyl, June 3, 2011

Phone interview with Steve Zuckerman, a senior fellow in the Health Policy Center of the Urban Institute, July 22, 2014

Email interview with Jon Gruber, professor of economics at the Massachusetts Institute of Technology, July 22, 2014

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Mitch McConnell claims 'devastating' tax increase on middle class looming due to health care law

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