Obamacare imposed New York’s expensive insurance regulations on the rest of the nation, to cheers from the Empire State’s political class. The payoff came last year: a vast influx of federal funds to offset New York’s exceedingly generous Medicaid program. The other shoe is about to drop.

Obamacare’s Cadillac Tax, a 40 percent excise tax on high-value (and currently untaxed) employer-based insurance, will begin to bite into the state’s overly generous public-union contracts in 2018. It should surprise no one that the wildly expensive, taxpayer-funded benefits of state and local workers and retirees will be the first hit. No one knows what the final tab might be. But the Metropolitan Transit Authority, at least, is starting to measure the full burden of the tax. Without reform to union benefit contracts, New York’s overly-tapped taxpayers will end up footing a massive bill.

The MTA now estimates that the agency will owe $30 million in Cadillac Tax payments in 2018. That’s a relatively small share (1.5 percent) of the roughly $2 billion that the agency expects to spend on retiree and current workers’ health care that year. But here’s the kicker: by 2021, payments are expected to reach $130 million, growing an average of 83 percent annually, about 76 percentage points faster than growth in total health-care spending. The Cadillac Tax could make up 5 percent of the agency’s total spending in 2021. And it will only get worse from there.

It didn’t need to be this way. Politics—and politics alone—created this situation. Recalcitrant unions have balked at reforming their zero-deductible insurance, and state legislators prefer to focus on pie-in-the-sky reforms like a single-payer health-care system. The Cadillac Tax has been a known quantity for years. Instead of bringing workers’ elaborate insurance coverage down to earth, labor and local politicians have called for D.C. to delay, if not repeal, the tax.

Full repeal, though, is a non-starter. The Cadillac Tax is expected to generate $87 billion over ten years to pay for Obamacare’s spending (including New York’s Medicaid expansion). Replacing that amount of money will require goring somebody else’s ox. Instead, a lesson from basic economics should guide reforms. When you pay a worker, you don’t just offer wages, you also offer various benefits (including health insurance, pensions, and vacation time). Collectively, this amounts to “total compensation.” If you cut one form of compensation in a competitive labor market, you have to raise another.

There is a simple way for the MTA to avoid paying the Cadillac Tax while ensuring that its workers retain better-than-average health coverage. Employers can push their health-care costs below the Cadillac Tax threshold by moving to plans that require more from workers in the form of deductibles, co-pays, and co-insurance and shifting the savings into cash wages. The Empire BlueCross BlueShield plan currently available to active workers demands almost nothing from beneficiaries. In the real world, where taxpayers live, some 80 percent of workers are covered by plans with deductibles (the average deductible in 2014 was more than $1,200).

For the MTA, avoiding its $30 million Cadillac Tax liability in 2018 would require a relatively small $447 average raise for workers. By 2021, this would grow to around $2,000 per worker (assuming that Cadillac Tax payments get shifted into wages, and that the number of employees—67,000—holds steady). And that’s on top of whatever other wage and productivity gains unions bargain for.

The Cadillac Tax will hit New York’s generous union plans, but if the unions and MTA are smart, everyone will walk out a winner. Embracing reform now is the best way for taxpayers and the MTA to avoid collision with the Cadillac Tax later.


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