
You've surely heard that one of Obamacare's revenue-generating mechanisms is a 40% excise tax on Cadillac health plans costing over $8,500 for individual plans and $23,000 for family plans.
You may be thinking you don't need to worry, because your health plan is comfortably under the cap. For example, I've got my most recent paystub in front of me, and my Kaiser HMO plan, which lets me see a doctor in six weeks if I really really need one, costs me $5,939.88 per year. $5,939.88 is less than $8,500, so I'm safe, right? Someone else has to pay for this, right?
Not so fast. There is a problem, and its name is "indexing."
Here's why indexing is a problem. It's nearing tax time again, and tens of millions of families are currently wondering whether this is going to be the year they are hit by the Alternative Minimum Tax, or AMT. You may recall that the AMT was passed in 1969 in order to circumvent the tax-minimization strategies of 155 wealthy families and require these families to start paying federal taxes. Problem is, the AMT was set at absolute levels and not indexed for inflation, and over time the tax that was supposed to apply to 155 families gradually expanded its reach and now ensnares tens of millions of middle-class filers every year. People who live in high-tax states and who (fortunately or unfortunately) have lots of deductions for things like mortgages, health care expenses, and state income tax suffer under the AMT, because these deductions are taken away and they need to pay federal tax on a greater share of their income.
Every year, Congress passes an "AMT patch" to limit the worst of the damage, although the AMT continues to damage the financial well-being of increasing numbers of middle-class filers, and is raising taxes from classes of filers not contemplated in the original legislation. Well, Congress passes a patch almost every year. Significantly, Congress failed to pass a patch in 2009, so tens of millions of Americans are anticipating April 15 with a tremendous sense of insecurity. (And we all know how insecurity is great for the economy and consumer spending!)
All because the AMT was not properly indexed, which brings us back to those Cadillac plans. The excise tax on Cadillac plans is indexed at inflation plus one percentage point, which is a degree of indexing entirely insufficient to prevent the gradual and inexorable extension of the excise tax to an ever-greater share of health plans. Health care costs don't rise in step with inflation, they rise far in excess of inflation, for very good reasons, including the increase in our elderly population, new medical advances, "defensive medicine," and the exorbitant investment necessary to get a new pharmaceutical to market. Health care is becoming more expensive because it is becoming more valuable and more heavily consumed, and Obamacare's goal of providing healthcare at public expense to tens of millions of previously under-insured consumers is only going to raise costs, not lower them.
So your healthcare costs are going to continue increasing faster than the rate of inflation, while the excise tax is only indexed for inflation plus one percentage point. Inevitably, the excise tax will begin to apply to your plan, and you'll be left wondering whatever happened to Obama's promises to let you keep your health plan if you like it, and to not raise taxes on anyone making less than $250,000 per year.