Obamacare’s Cadillac Tax Poses Problem for Unions and City Finances


“When you and the President sought our support for the Affordable Care Act (NYSE:ACA), you pledged that if we liked the health plans we have now, we could keep them. Sadly, that promise is under threat,” read the July 2013 letter penned by James P. Hoffa of the International Brotherhood of Teamsters, Joseph Hansen of United Food and Commercial Workers, and D. Taylor of UNITE-HERE — then sent to Democratic Senators Harry Reid and Nancy Pelosi.

In the weeks since that letter was written, many cities and towns across the United States have taken a hard look at the costs taxed on the most expensive health insurance plans that Obamacare will add beginning in 2018 — and the expected price tag has prompted governments to ask municipal unions to accept cheaper health benefits.

The so-called Cadillac tax was included in the health care reform at the recommendation of economists who argued that expensive health insurance plans that require the employee to bear little of the cost make people insensitive to the cost of health care. That provision of Obamacare will impose a 40 percent tax on health insurance plans that cost more than $10,200 annually for individuals and $27,500 for families. However, the cut-off will be slightly higher for retirees or those in high risk professions like law enforcement.

In regards to public employment, where benefits are determined by the bargaining process, the insurance coverage that labor unions negotiate often falls well above that cut-off. Due to the bargaining process, it will likely be hard for municipalities to switch workers to cheaper plans.

State and local governments typically offer more expensive plans than private business do, and to retain these benefits, workers tend to receive smaller wage increases. This tendency means that government employees will likely be disproportionately represented among those whose plans will be taxed.

Cities like New York and Boston, along with school districts from Orange County, California to Westchester County, New York have told unions that if skyrocketing health costs cannot be reined in now, the massive cost of the tax could cause financial problems, thereby threatening raises and jobs, reported The New York Times. “Every municipality with a generous health care plan is doing the math on this,” J. D. Piro, a health care lawyer at a human resources consultancy firm, Aon Hewitt, told the publication.

This phenomenon has made several prominent liberal intellectuals concerned. In their estimation, the tax has become a weapon to be used against unions in negotiations. “I think it was misguided all along,” Robert B. Reich, the former Secretary of Labor wrote in an email to the Times. When the reform law was in the drafting stage, he said, he worried that the tax would be “a blunt instrument that could too easily become a bargaining chit for cutting back benefits of workers.” That is apparently what it has become, added Reich, who is also a professor of public policy at the University of California, Berkeley.

In New York, city officials expect the cost of its two most popular employee health plans will reach taxable levels by 2018 or soon after, reported the Times. The total cost of health care for the city’s approximately 300,000 employees, pre-Medicare-age retirees, and their dependents is expected to come close to $8 billion by 2018. As Caswell F. Holloway IV, deputy mayor for operations, said in an April letter to the head of a labor coalition, the Cadillac tax will cost New York City $22 million in 2018 and $549 million in 2022.

As for Boston, most of the city’s 20,000 employees are covered by plans that will exceed the tax threshold by 2018. “The tax is going to be a hit, and, if you’re not expecting it, it’s going to be very shocking,” Meredith Weenick, the chief financial officer for Boston, told the publication. “In the end, it’s the taxpayer that’s going to bear that burden,” he added.

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