OP-ED

Obamacare’s Fiscal Cliff

Did you notice that in the standoff over the fiscal cliff, all the discussion was about the Bush tax cuts? Which ones would be made permanent? And for whom? There was no discussion about the ObamaCare tax increases. I think that was a huge tactical mistake on the part of the Republicans.

Over and over again, President Obama claimed he was trying to protect the middle class from higher taxes. It was a claim that went unchallenged ― by the Republicans and by the mainstream media.

Yet five of the tax increases Americans are facing this month are new taxes created under the Affordable Care Act (ObamaCare). Three of the five will hit people who are solidly middle class.

Next year, things will get worse. The new tax on health insurance is about as regressive as a tax can be. It will total $100 billion over the next 10 years and very little of that amount will be paid by anyone who can be called “rich.”

  • The health insurance tax will fall on private sector Medicaid plans, which have about 70% of all Medicaid enrollees.
  • The tax will fall on Medicare Advantage plans whose enrollees have below average incomes and are disproportionately minority.
  • The tax will hit every small business and every individual who buys insurance in the commercial market place.
  • The tax will not fall on self-insured plans whose enrollees include the highest paid workers and the highest paid CEOs.

The ObamaCare taxes that kick in this month will hit everything from dividends and capital gains to day care and services for special needs children. They will increase the tax bill for those who have extraordinary medical expenses ― at the very time when they can least afford to pay higher taxes. They will hike the tax burden for the chronically ill who have several thousand dollars of out-of-pocket prescription drug expenses every year. The taxes will fall on medical devices ranging from pacemakers and artificial hips to bedpans and stents.

All told, these new taxes will create a burden in excess of $250 billion over the next 10 years.

The case for delaying these taxes is strong. Clearly they will depress economic activity and slow the recovery. But there is also another reason: we don’t need the money. The new ObamaCare taxes are supposed to provide the revenue to furnish subsidized health insurance to millions of people who will begin buying it in health insurance exchanges in January 2014. But the subsidies won’t be needed if the insurance is not available, and it won’t be if the exchanges are not up and running at that time.

Here is my prediction: aside from two states that already have exchanges (Massachusetts and Utah), only one other state (Maryland) will make the deadline. Maybe Colorado and California will make it if they are lucky. But that’s it. No other state is going to have operational exchanges on time.

In fact, half the states aren’t even planning to set up exchanges. That responsibility will then fall to the federal government. But no money has been budgeted to fund such a large federal operation. The full implementation of ObamaCare could actually take years. In the meantime, let taxpayers keep more of their income to meet their own needs.

Here is a brief summary of the taxes that kick in this month, courtesy of Americans for Tax Reform.

Medical Device Tax: $20 Billion. This 2.3% tax on gross sales could amount to a very large percent of after tax profit ― thus encouraging an industry that is providing very good domestic jobs to relocate overseas. Meanwhile, the burden of the tax will be reflected in higher prices for anyone who needs an artificial knee or hip or a pacemaker.

Flexible Spending Account (FSA) Limits: $13 Billion. Roughly 35 million Americans use FSA accounts to pay medical expenses not paid by the employer’s health insurance with pre-tax dollars. These accounts are especially important to chronic patients with substantial out-of-pocket drug expenses. FSAs can also be used to pay for day care and services for special needs children. Currently, there is no legal limit on how much an employee can deposit in the account, but many employers cap the annual contribution at $5,000. After January 1, however, contributions will be limited to $2,500 ― effectively cutting the tax advantage in half.

Surtax on Investment Income: $123 Billion. Democrats often say they merely want to return to Clinton era tax rates for the highest-income taxpayers. They conveniently omit the fact that ObamaCare adds 3.8 percentage points to those rates ― bringing the highest marginal tax rate up to 43.4% for individuals making more than $200,000 and couples earning above $250,000. Add on a 13% state tax in California and some taxpayers will be paying more than half of all they earn to the government. The new tax hits dividends, capital gains and other investment income.

Limits on Itemized Medical Expense Deductions: $15.2 Billion. Currently, people can deduct medical expenses in excess of 7.5% of income if they itemize. Next year, that threshold will rise to 10%. This means a higher tax burden for those who have the misfortune to have large medical bills. It is literally a tax on the sick.

Higher Payroll Tax: $86.8 Billion. The Medicare payroll tax is currently 2.9% on all wages and self-employment profits. Under this tax hike, wages and profits exceeding $200,000 ($250,000 for a couple) will face a 3.8% rate instead. This is a direct tax hike for small business owners, who are liable for self-employment taxes in most cases.

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis. He is also the Kellye Wright Fellow in health care. His Health Policy Blog is considered among the top conservative health care blogs where health care problems are discussed by top health policy experts from all sides of the political spectrum.

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JeanetteMelinda HuffmanJohn BallardBob HertzBarry Carol Recent comment authors
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Jeanette
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Jeanette

I’m nobody but, at the same time I am’Somebody’. I am my Mother’s daughter, my brother’s sister, my Grandmother’s grandchild…..Pretty much like anybody else on this planet. I’ve worked HARD all my life, took care of my family and made a living as best I could. I put MYSELF thru college…earned a degree…several as a mater of fact…but, are on NO SERVICE to me now! I’m 61 now…a widow, my husband has passed, my Mum, my brother…all of the family I shared every day life with. I am not unique, I am no different than 1,000’s of others’ in the… Read more »

Melinda Huffman
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Melinda Huffman

I advocate that the Administration, Congress, and John Roberts and company receive the same healthcare that the people receive, and pay the same TAXES for it!!!

John Ballard
Guest

Of course now that so many individuals and families are in the six-figure range, the financial and tax problems are not as challenging as they might seem.

http://www.slate.com/content/dam/slate/blogs/moneybox/2013/01/16/wsj_fiscal_cliff_infographic/1358357370309.jpg.CROP.article568-large.jpg

Bob Hertz
Guest

Up until the ACA, a hedge fund manager (or Mitt Romney) paid zero in Medicare taxes on capital gains and Sub-S profits. In fact, when John Edwards was a trial lawyer, his advisors bragged that he steered $30 million of income a year into Sub-S profits, on which the Breck girl himself paid no Medicare taxes. As Barry notes above, the new 3.8% Medicare tax on investment income is aimed right at the rich, and appropriately so given the rise in inequaity. Goodman is normally a decent and provocative commentator……..but he is pulling a sly trick right here. Get the… Read more »

Barry Carol
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Barry Carol

I think it’s unfortunate that fiscal debates in recent years focus on aggregate amounts over a 10 year budget horizon as opposed to annual amounts. The $250 billion in new taxes over 10 years that John Goodman talks about compares to probably at least $20 trillion that will be spent by private insurers and federal and state government payers on medical claims over the same time period. It’s little more than 1%. The reduction in what employers can contribute to an FSA from $5K to $2,500 should probably be eliminated altogether as part of tax reform that would broaden the… Read more »

Peter1
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Peter1

It’s reassuring to know that John Goodman is finally looking out for the little guy in this economy.

TomS
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TomS

In order of dollar magnitude, the author has listed: Surtax on investment income, increased payroll tax on those making > $200K, medical device tax, limits on itemized medical deductions, and FSA limits.

The two largest items on this list (surtax & payroll tax) account for ~$210 of the $250 billion “additional burden” and obviously impact upper-income Americans more than the middle class.

It’s fine to point out the additional taxes stemming from Obamacare, but false and misleading to argue these taxes will unfairly or disproportionately burden the middle class.

BobbyG
Guest

Limits on Itemized Medical Expense Deductions:

$15.2 Billion. Currently, people can deduct medical expenses in excess of 7.5% of income if they itemize. Next year, that threshold will rise to 10%. This means a higher tax burden for those who have the misfortune to have large medical bills. It is literally a tax on the sick.
__

How many people even itemize, and where do they fall in the income distribution? What is the plain dollar net value of such “deductions”?

Net.

Curly Harrison, MD
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Curly Harrison, MD

Thank you. How do you expect them to pay for the HIT catastrophe that is besetting USA as it did the UK? Who is paying for this at UCSF? http://www.bizjournals.com/sanfrancisco/blog/2013/01/ucsf-medical-center-throws-a-great.html?page=all

Too bad that the HIT devices that are disrupting care and increasing costs are not paying the device tax. Boondoggle!

Cynthia
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Cynthia

ObamaCare is incredibly arcane, poorly written, and weighted down with thousands of rules & regs, not to mention boards, panels, and bureaucrats. It is simply not workable in the real world–doomed to fail. Just watch and see.