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As Cadillac Tax Threat Looms, How Can Unions Respond?

November 13, 2015 / PSU-AAUP

Labor Notes
November 2, 2015

Labor Notes interviewed Mark Dudzic, coordinator of the Labor Campaign for Single Payer, which just issued a new report on the tax. Download it at laborforsinglepayer.org.

Labor Notes: What is the Cadillac tax?

Mark Dudzic: The Cadillac tax is a provision in the Affordable Care Act (ACA) which will take effect January 1, 2018. It will place a 40 percent marginal tax rate on employee health benefits that cost more than $10,200 for individual coverage or $27,500 for family coverage. (These numbers vary slightly for certain occupational and age groups.) The limits will adjust upward every year by the average increase in the cost of living.

How many plans will the tax affect?

We think ultimately it’s going to affect all plans, because it adjusts annually based on the Consumer Price Index—whereas medical costs usually increase two or three times faster. Medical inflation has been lower than the overall CPI only one year in the last 50.

So in the end all plans will be affected, unless they’re radically restructured to cut benefits. Right now the estimates are that, in 2018, 48 percent of large-employer plans will be subject to the tax.

Why is it called the Cadillac tax?

The name was designed to give the impression that these were privileged benefits—that it’s this greedy class of workers. It’s a nasty term, with racial overtones harking back to the old “welfare Cadillac.” It really denotes Chevy benefits that ordinary working people have a right to expect.

What types of plans will the tax affect immediately?

They tend to have low deductibles and low copays—standard plans that unions have negotiated over the years. A typical good union plan these days might have a $500 annual deductible, and $10-$20 copays for pharmaceuticals, doctor visits, and other services.

It’s all happening very quickly. Contracts we’re negotiating now will be subject to this tax in 2018. The tax is one of the issues in the big Allegheny Technologies lockout, and in the unsettled steel contracts at U.S. Steel and ArcelorMittal.

How are employers responding?

First of all, they are accelerating their usual demands to cut costs on the backs of workers. But making workers pay a higher percentage of premiums does not help avoid the tax, since it’s based on the full cost of benefits. So the most common proposal these days is to move to high-deductible, “consumer-driven” health plans.

More recently, they’ve woken up and seen that this tax is not a good thing—both for them as employees (executives’ own generous benefits would be subject to it) and as employers who use health benefits to recruit workers.

So there’s been a growing outcry by business. Even the national Chamber of Commerce is calling for repealing the tax.

Are public employees affected?

Yes. A lot of public employers have been somewhat slower to understand the impact, but they’re starting to wake up. For example, an association of municipal groups in Washington state just calculated their member cities would have to raise an additional $76 million to cover the tax.

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