Can the Cadillac Tax Be Made Less Regressive by Replacing It with an Exclusion Cap?

Methods and Results

by Chapin White, Sarah Nowak, Christine Eibner

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One of the sources of funding for the coverage expansions in the Affordable Care Act is the so-called Cadillac tax, which is scheduled to take effect in 2018. The Cadillac tax consists of a 40-percent excise tax on premiums for employer-sponsored health plans in excess of a dollar limit. One alternative to the Cadillac tax is an "exclusion cap," under which individuals enrolled in employer-sponsored plans would be able to exclude premiums from their taxable income only up to a dollar limit (i.e., the cap). This analysis uses RAND's COMPARE microsimulation model to (1) define an exclusion cap scenario that would produce the same amount of federal tax revenues as the Cadillac tax in 2020 and (2) compare the effects of the exclusion cap and the Cadillac tax on families in different income ranges. The analysis shows that there is very little difference in progressivity between the Cadillac tax and a revenue-equivalent exclusion cap.

This RAND report is the technical appendix that accompanies the National Institute for Health Care Reform's Research Brief No. 20, "Limiting Tax Breaks for Employer-Sponsored Health Insurance: Cadillac Tax vs. Capping the Tax Exclusion," October 2015.

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This research was funded by the National Institute for Health Care Reform and conducted within RAND Health, a division of the RAND Corporation.

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