In December 2015, Congress delayed implementation of the so-called Cadillac tax, a 40 percent excise tax on high-cost employer health benefit plans. Now scheduled to be implemented in 2020, the Cadillac tax would effectively cap the current tax exclusion for employer health benefits. By excluding health benefits from taxable incomes, the current tax break creates incentives for employers to pay more of employees’ compensation via health benefits instead of taxable wages, possibly leading to overuse of health care services and driving up health costs.
Economists are generally keen to reduce or cap “tax expenditures,” like the current tax exclusion, to help prevent overuse of tax-favored items. We also tend to worry about the relative inefficiency of the health sector in particular, and the adverse impact of ever-higher health costs on federal and state budgets.
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