Politics & Policy

Cadillac Tax Evasion

The nation’s labor unions, according to Congress Daily, have cut a deal with House Democrats: Labor will drop its opposition to the so-called Cadillac tax — an excise tax on high-cost employer-provided health-care plans — if Congress will carve out an exemption for plans provided under collective-bargaining agreements. Even after all the unsavory bargains and rotten deals that have characterized the rush to get this thing passed (the “Louisiana Purchase,” the “Cornhusker Kickback,” etc.) the “Labor Loophole” surely takes the prize. A few Democrats in the Senate already tried this trick and were laughed out of the smoke-filled room, so nakedly obvious was the special-interest favoritism at work. That the Democratic party is seriously reconsidering this deal is a sign of how desperate it has become to pass a bill — any bill — that shoves the federal foot through the waiting-room door.

The story of the Cadillac tax is interesting in that it illustrates how hard it is to pass extremely unpopular legislation. After Obama pledged not to sign a health-care bill that added “one dime” to the deficit, Democrats in Congress needed to figure out a way to raise enough revenue to pay for hundreds of billions in new health-insurance subsidies and Medicaid extensions. An additional constraint was their need to do this without blatantly breaking Obama’s pledge not to raise taxes on households making less than $250,000 a year.

Thinking it would be a good way to demagogue Wall Street, Senate Democrats came up with the Cadillac tax. Only later did they realize that they had aimed for Goldman Sachs but hit the UAW. Many of the nation’s most expensive health-care plans can be found in the collective-bargaining agreements of the old-line unions. The tax-exempt status of employer-provided health insurance made it easier over the years for management to increase benefits rather than wages. This is one reason why the unions were so adamantly opposed to John McCain’s health-care plan in 2008. McCain’s plan would have equalized the tax treatment of employer-provided and individual plans and given everyone a large refundable tax credit to spend on health care. This might be the single most sensible health-policy reform Congress could enact, but the unions oppose it; McCain’s tax credit would not have been big enough to pay for all the benefits they enjoy as part of their tax-exempt Cadillac plans.

Most health-care economists like the tax on Cadillac plans because, theoretically, it would encourage employers to spend less on health care and use the savings to increase wages. This would — again, theoretically – bring down premiums and increase tax revenue (because wages are taxed and benefits are not). Unions are skeptical, and one can see why. The cash-starved auto industry, for instance, does not seem likely to increase wages if freed from its onerous health-care obligations. That’s why the more liberal (and more union-friendly) Democrats in the House favor a so-called millionaire’s tax instead, which would raise revenue by — you guessed it — taxing millionaires. But this tax is going nowhere in the Senate. Thus yesterday’s compromise: A version of the Senate’s preferred tax, but with a carve-out for the Democrats’ most powerful special-interest group.

The Democrats are fighting a losing battle: Every time they make a corrupt compromise to buy votes, a disgusted public likes the bill a little less, which drives down its popularity in the polls, which increases the number of votes the Democrats have to buy. As Ramesh Ponnuru and Yuval Levin noted in the latest issue of National Review, the end product of this process will present a big red target for Republicans to shoot at all year. The Labor Loophole would make that target even bigger.

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