POLITICS
12/08/2015 05:18 pm ET Updated Dec 08, 2015

The Biggest Blow To Obamacare Yet Could Come From Democrats

Congress is poised to delay the controversial "Cadillac tax" by two years.

Congress is on the brink of taking a big bite out of the Affordable Care Act, after more than five years of mostly futile efforts by Republicans to weaken or repeal the law.

Both houses now seem intent on approving a two-year delay in the introduction of the law’s “Cadillac tax” -- a controversial levy on expensive health insurance plans -- as part of must-pass legislation now moving through Congress. But while Republicans are happily supporting the delay as a blow to Obamacare, multiple sources privy to negotiations say it's the Democratic leaders in Congress, responding to pressure from labor unions, who have insisted on acting now.

In fact, pretty much the only powerful Democrat interested in fighting to keep the tax in place and on schedule is the one in the Oval Office. And all signs point to President Barack Obama going along with this proposal, however reluctantly, because the pressure to avoid the Cadillac tax has become so overwhelming -- even Hillary Clinton has joined the calls -- and because the change could be folded into a broader legislative package that would provide significant benefits to low-income Americans.

Obama's signature on such a measure would signal the biggest modification of Affordable Care Act to date. The Republican Congress, with some assistance from Democrats when they controlled the Senate until this year, has enacted a variety of changes to the law. Most of those haven't had the potential to weaken its twin aims of expanding health coverage and taking control of escalating national health care spending growth.

Altering the Cadillac tax would be different -- and more consequential.

The tax applies to the most expensive private health insurance plans, and is designed to counteract an existing provision of the tax code that, in effect, makes a dollar of health insurance worth more than a dollar of wages. Economists believe this provides artificial incentive for employers to provide generous health insurance. As the theory goes, workers end up using more health care services, without worrying about the cost, because their insurance picks up a huge share of the expense.

The Cadillac tax would gradually, though not completely, reverse these incentives. The hope has been that employers and insurers would respond by finding ways to offer cheaper insurance, ideally by demanding lower prices and higher value, while workers would end up better off because the extra money would show up in their paychecks. In the long run, many economists say, this effect could ripple through the rest of the health care system, helping to keep medical spending from rising too quickly.

Back in 2009 and 2010, the Congressional Budget Office cited the tax as a major reason it thought the law would end up reducing the deficit. The tax is also a key source of revenue. Projections suggest it would generate $91 billion over the next decade.

But the tax has been highly unpopular, in part because of fears that businesses will react simply by cutting back on benefits in company health plans, leaving workers with higher exposure to out-of-pocket costs. Probably nobody hates the Cadillac tax more than representatives of the labor movement, because many unions negotiated for their members precisely the kind of generous plans subject to the fees. They and their supporters argue that, while the tax may result in lower insurance premiums, workers won't end up seeing the savings in their paychecks -- at least not anytime soon.

Democratic leaders in Congress have been trying to do something about the Cadillac tax for quite a while. The end of the year has provided an opportunity to act, because of a much larger package of tax cuts that the White House and congressional leaders have been discussing for several weeks. That package would make permanent some unrelated tax breaks -- some (favored strongly by Republicans) for corporations and some (favored strongly by Democrats) for the working poor.

In just the last few days, Democratic leaders -- and, in particular, Senate Minority Leader Harry Reid -- insisted that any package include a two-year delay of the Cadillac tax, so that it takes effect in 2020 rather than 2018. And while Republican leaders are in no rush to do the Democrats or the unions any favors, they are hearing from business supporters who share labor's antipathy for the tax.

The GOP leaders have signaled their support for the Cadillac tax delay as part of the big tax package -- as long as it comes with a similar, two-year "pause" in a tax on the medical device industry. That's no problem for the Democrats, since many of them represent states or districts with large device makers -- and have been joining the GOP in its calls to delay or repeal it.

In the past, the White House has fought hard to defend both the Cadillac tax and medical device tax. But the president would have a difficult time vetoing a bill that includes tax relief for the working poor, given political circumstances. Among other things, the intense political opposition to the Cadillac tax means that it is unlikely to survive, in current form, past this administration anyway. Just last week, an amendment to eliminate Cadillac tax repeal as part of a broader proposal to repeal the Affordable Care Act passed by a vote of 90 to 10.

For proponents of these taxes, the big danger of delay is that it could be a prelude to demise. Once Congress postpones a tax for the first time, it has a habit of doing the same thing over and over again, so that the tax never takes effect. Still, postponing these taxes rather than fully repealing them at least preserves the possibility that future lawmakers could find some alternative way of accomplishing what the taxes are supposed to do -- at least in part.

Of course, talks over the massive tax cut package could still break down. One sticking point is a demand, by House Minority Leader Nancy Pelosi, that the legislation include better tax breaks for the working poor. But if that happens, Congress will almost certainly end up passing a different tax bill -- one that temporarily extends some expiring corporate tax breaks, as it has done in the past. And on Tuesday, Kevin Brady, chairman of the House Ways and Means Committee, said that Republicans might just include a two-year delay of the Cadillac tax -- as well as the “pause” in the device tax -- in that package.

That would render a delay in the Cadillac tax more or less inevitable, no matter how negotiations over those other tax provisions go. For the administration, it may not be a question of whether to accept the delay, but what if anything it can get it return.

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