Businesses say feds wrong to assume wages will rise as benefits shrink

Companies aren't paying workers more as they cut spending on health benefits, a trend that threatens to undermine the key estimate of the funding for Obamacare, federal data show.

The Congressional Budget Office estimates a controversial excise tax that employers will have to pay on generous health benefits starting in 2018 will raise about $87 billion in revenue over 10 years.

About 75% of the revenue from this  "Cadillac tax" is supposed to come from taxes on the higher wages workers are supposed to get as companies slash their benefits to avoid paying the tax. The other 25% or so is expected to come from the tax itself.

Companies will have to pay 40% of the value of benefits over a certain threshold.

"How CBO is scoring this is completely flawed," says Brian Marcotte, CEO of the National Business Group on Health, which represents employers. "It really reflects a lack of understanding how companies make wage decisions."

This revenue is supposed to help fund the Affordable Care Act's expansion of health care to millions of people and to keep the law from adding to the deficit.

Companies have a vested interest in killing and undermining the tax, which labor groups have targeted for years and many politicians from both parties oppose. Employers blame the tax for the increasing share workers pay for their benefits, and they don't want to shock workers with a sudden drop in benefits in two years.

Survey findings vary, but it's clear at least a third to half of all employers have health plans that would trigger the tax in the next five years if they didn't shift more of the costs to employees.

A huge drop in benefit growth rates in 2011 clearly enabled employers to increase wages at that time, says former Labor Department economist and official Mark Wilson. Wage growth should have picked up as the unemployment rate dropped to 5% since then, he says, and Bureau of Labor Statistics data show it hasn't.

Wages make up about 70% of total compensation, and benefits account for about 30%, so the percentage point change in the rate of growth in wages and benefits don't mirror each other, says Wilson,  chief economist for the business-funded American Health Policy Institute.

Marcotte, former vice president of benefits at Honeywell, says companies may reinvest any money they get from paying less for benefits or might add to retirement accounts or start life insurance policies, moves that wouldn’t lead to higher tax revenue.

In a long-term budget outlook published in March, the CBO predicted  "total tax revenues would ultimately rise compared with what they would have been without the tax."  The CBO noted that some of the health benefit savings may show up in profits rather than wages, but those get taxed, too, so they would increase revenue.

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Corporate profits have been down in the past few quarters.

CBO spokeswoman Deborah Kilroe declined to comment beyond the report.

Most people say they don't believe their employers would increase their wages if the companies paid less for health insurance, according to a Kaiser Family Foundation survey last month of 1,200 people. More than three-quarters of the respondents say their employers would not increase wages, and 20% say their wages would increase.

The CBO's estimate may be high, but it won't be off by much, says Larry Levitt, senior vice president at the Kaiser Family Foundation.

"Sometimes the higher wages happen in subtle ways that aren’t apparent to people," Levitt says. "Wages might creep up over time,"

Although many are opposed to the Cadillac tax, no one in either party seems to have figured out how to do without it.

"Everybody understands if you are going to expand coverage as the ACA does, it has to be paid for somehow," Wilson says. "That's the $87 billion question."