Replacing the Cadillac Tax: Options and Considerations

The ACA instituted, for the first time in over half a century, a tax on the value of employer-sponsored health insurance, known as the Cadillac tax. This step represented a significant shift in policy that has the potential to affect more than 150 million Americans covered by such insurance. While there are strong justifications for either repealing or reforming the Cadillac tax, policymakers should be apprised of the potential benefits and pitfalls of each approach. In this paper, we review the history of employer-sponsored health insurance and offer three options for replacing the Cadillac tax without returning to the undesirable pre-ACA status quo: 1) Eliminate the Cadillac Tax and the ESI tax exclusion; 2) Eliminate the Cadillac Tax and cap the ESI tax exclusion; and 3) Replace the Cadillac Tax and the ESI tax exclusion with income-based subsidies.