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Tax cut ahead if high court voids health care law

Expectations in Washington have reached feverish heights as supporters and foes of the Affordable Care Act fret about a Supreme Court ruling in the next few weeks that will decide its fate – and potentially set off a cascade of policy reverberations.

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Twenty-six attorney generals, who are the plaintiffs of the lawsuit against the healthcare reform, leave the U.S. Supreme Court March 28, 2012 in Washington, DC.

If the justices strike down the law in its entirety, for example, they would do away with $1.4 trillion in planned spending over the next ten years. Since there would be no expansion of Medicaid eligibility and no creation of insurance subsidies for middle-class people, the money for those benefits wouldn’t be spent.

A ruling which invalidated the law would also cancel more than $400 billion in tax increases between now and 2021 that Congress designed to help pay for the expansion of insurance coverage.

The last time the Supreme Court struck down budget legislation was in 1998 when it ruled the Line Item Veto Act unconstitutional. Before that, one has to go back to the 1930s and the high court’s clash with President Franklin Roosevelt and the Democratic Congress to find the justices striking down a major revenue measure.

If the justices do hold that the ACA is unconstitutional, the tax revenue that would be cancelled is significant, but more important from health care policy makers’ point of view is the type of taxes that would killed.

As Congress was writing the law in 2009 and 2010, a recurring theme among health care reformers such as MIT economist Jonathan Gruber and former Congressional Budget Office director Alice Rivlin was that any overhaul should reduce the tax code’s subsidization of unnecessary health care. Gruber and other reformers wanted to begin to limit the tax-free status of employer-provided health insurance.

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The law that President Obama signed on March 23, 2010 moved in that direction. It relied heavily on taxing benefits that go mostly to well-off people to help raise the money to insure the uninsured.

By 2019, once all the tax provisions take effect, more than two-thirds of the new tax revenues to pay for the Affordable Care Act will come from just two taxes: the increased Medicare tax on upper-income people and the tax on so-called “Cadillac” employer-provided insurance plans.

The Medicare tax increase is set to take effect on Jan. 1 of next year, while the tax on Cadillac health plans is not slated to begin until 2018.

The Medicare tax increases the tax rate on wages to 2.35 percent on earnings over $200,000 for individuals and $250,000 for married couples filing jointly. It also creates a new 3.8 percent tax on investment income for those same taxpayers. The thresholds are not indexed to inflation so in time they would begin to affect more and more middle-income people.

The 40 percent tax on Cadillac plans will apply to coverage that costs more than $10,200 for individuals and more than $27,500 for family coverage. After 2020, the tax thresholds would be indexed to the inflation rate – but since health insurance costs have risen faster than the overall inflation rate, over time the tax would likely begin to bite a greater and greater percentage of those with insurance.

The tax on Cadillac plans drew adamant opposition from labor unions and from some Democratic members of Congress, who despite their final votes for the ACA, might be happy to see the tax on Cadillac plans eliminated.

As Sen. Debbie Stabenow, D- Mich., said at a meeting of the Senate Finance Committee when it was writing the bill, the criticism of Cadillac plans “really doesn't hold true for many, many working Americans, who over the years have given up salary increases to get their increased (health insurance) benefits….and they are now because of cost increases, the same cost increases we are trying to address overall and reform, they are seeing their co-pays and deductibles go up.”

She said, “I don't want to see them in addition to that have to add an additional tax” while “they are trying to figure out how to keep their health insurance.”

In one month, the Supreme Court is expected to announce its decision on the constitutionality of President Obama's Affordable Care Act. With universal health care to Americans on the line, will the court uphold the full law, just portions, or completely scrap the legislation?

But Gruber said both in his testimony to the Senate Finance Committee in 2009 and in his book published last year, “Health Care Reform: What It is, Why It’s Necessary, How It Works,” that taxing high-cost plans was needed to contain costs.

“Folks are encouraged to use extra care by their overly generous, tax-subsidized insurance,” Gruber said.  The tax on Cadillac plans, he said, is “not really a new tax on insurance. It’s an attempt to offset the existing unfair and inefficient tax break we now provide.” By taxing Cadillac plans, “We stop subsidizing employers from buying overly generous insurance that induces wasteful medical spending.”

Although House Budget Committee chairman Paul Ryan and Mitt Romney support a tax overhaul that would combine lower tax rates with fewer tax preferences, they haven’t specified whether the current tax-free status of employer-provided insurance is one tax preference they’d seek to limit or eliminate.

Romney does say in his economic blueprint that “The approach taken by the Bowles-Simpson Commission is a good starting point for the discussion.”

The Bowles-Simpson commission’s report suggested that one option for reducing deficits and creating a simpler tax system would be to phase out the tax-free status of employer-provided insurance. And Congress took a step in that direction by passing the Affordable Care Act, but in the wake of a Supreme Court decision, it may need to begin with a clean sheet of paper and redesign both tax policy and health care policy.

Gruber said Monday he thinks that Congress would not likely take on the tax-free status of employer-provided insurance outside the context of the ACA.

On policy grounds he said, limiting the tax break for insurance “makes a huge amount of sense when folks can access well-functioning non-employer markets, as they will be able to under ACA.  If they can't, there are risks in employers scaling back coverage, as might happen under a Cadillac tax.”

He added, “This is a policy that health policy experts have been fighting for over decades, and we were only able to get it in the context of the larger ACA. I highly doubt it could survive as a stand-alone.”