From CBO, A Suggestion That Firms Can Profit by Dropping Health Coverage
In its updated economic forecast last week, the Congressional Budget Office made a series of comments regarding Obamacare’s “Cadillac tax.” Most notably, CBO appeared to suggest that employers could increase corporate profits by dropping their health plans for workers.
The budget office had previously noted an interaction between untaxed benefits such as health insurance and taxable wage compensation—namely, that reductions in the latter can lead to increases in the former, thereby increasing federal revenues. Last week, however, CBO went further, suggesting that reducing health benefits could lead to higher corporate profits:
Less employment-based coverage means that nontaxable compensation in the form of health benefits provided by employers will be less and taxable compensation in the form of wages and salaries will be greater, as total compensation is expected to remain roughly the same. And to the extent that wages and salaries do not increase as much as payments for health benefits are reduced, corporate profits—which are also taxable—would increase. Therefore, the decrease in the estimate of employment-based coverage implies higher federal revenues than projected previously.
In other words, CBO believes that dropping health benefits could raise federal revenues not because firms increase their workers’ taxable wages to compensate for the loss of subsidized insurance coverage but because they choose to improve their own bottom lines instead.
This could have both political and policy ramifications. The statement comes as CBO slightly lowered estimates for the number of individuals with employer-sponsored coverage. This will affect policy debates over the future of employer-provided health care (Will firms continue to provide coverage for the foreseeable future?) and the Cadillac tax: Will firms that reduce health benefits to avoid the tax provide higher wages to workers or pocket the savings instead? And it may provide supporters of the health-care law with a new political headache, because nonpartisan analysts are suggesting that corporations may use Obamacare to fatten their own bottom line.
This post was originally published at the Wall Street Journal Think Tank blog.