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.

10 replies »

  1. 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 same boat!
    What’s my point you say?… Well, what this country has lost and continues to see…is the core values that this country was built upon!
    We are ALL immigrants if we are not American Indians! We came to this country in the pursuit of a new life, a new opportunity…to better ourselves. We were allowed in this country is we were free of disease and had a craft/skill. That’s ALL…there was no government subsidy of $5,000/mo to live or being exempt from taxes for 10 years (BTW, all they have to do is change the business into another family members name and they get another 10 years…it can go on FOREVER)…
    When my ancestors….3 generations ago…came to this country. We were seeking the opportunity to have a ‘better life’. We were free of disease and had a craft…we weren’t offered any government assistance, let alone a job. But, WE made it work! We went without and worked HARD and we made a life….a better life than we had in ‘the old country’. We weren’t afforded the luxury of bringing all our relatives to this country…NO, our families ‘pooled’ their savings to BUY passage to a promise of a better life for a chosen few. We had values, morals, principals, ethics, etc…and in no way, were going to let down the families we left behind…So, we MADE IT WORK!
    My grandfather was a lumberjack in Sweden….my family settled in Northern Michigan…much like the ‘homeland’. He fell in love with a young French girl … half his age…they married, had two children. They built a life in this country from the sweat of their brow! Nothing was given to them…
    The depression hit! Gram would sell baked goods…door to door…feed those who came to her door that were hungry. And….go to the stock market and watch the ticker-tape….with the pennies she made….she invested, without the knowledge of my Grandfather. Gram has a shrewd business sense…she was a ‘natural’. She bought into this and that…what grew, she bought more…what didn’t, she let go.
    My Grandmother and Grandfather would purchase into homes that were lost…much like today, they’d live in them, fix them up and sell or rent them. They lived out of boxes! Mum would tell me stories of never having a ‘home’…always on the move…fixing, selling or renting….and all the time…always offering a meal for those less fortunate. Gram and Gramp built a life together…they worked long hard hours but, they made their own way. No assistance, no hand-outs, no sympathy. Back then, you made your own way! And MOST prospered! That is what this country is built on….not hand-outs, supplements, assistance.
    If you can’t keep your legs together…raise the child the best you can or give it up for adoption to a family that can give it a better life. If you don’t want to work…then, go without. If you don’t or can’t make your mortgage payment…then, live in your car, if you don’t have one, or on the streets. Once the government realizes that without “the people” they have no source of income…maybe they will WAKE UP. If you can’t make the money…you can’t pay the taxes…no taxes, no money to operate…
    Think of the economy/government from the stance of a plant….you can keep cutting away at the roots/foundation of the plant…a few here, a few there….and the plant will adjust. BUT, if you continue to cut away at the roots of the plant…guess what, it will DIE! Instead of cutting at the root…why not try the novel idea of cutting the foliage….cut from the top.
    I can’t afford a $1,000 dress suit, fancy dresses, dinner parties; trips to “God knows where” at the government’s expense…let alone a $100,000 + salary for LIFE! Cut out the CRAP! Dress like a regular person…get a $10 hair cut, eat chicken and a salad…that YOU PREPARED and CLEAN UP AFTER YOURSELF. Live like a NORMAL human being. Just because you’re President doesn’t make you any different than “the people” that you are suppose to represent! And as for taking care of you and your family for the rest of your life…WTH! ALL my family is DEAD and NOBODY is taking care of ME…but, ME!
    This country has gotten too TOP HEAVY! There is no more MIDDLE CLASS! It has come down to those who live off the FAT OF THE LAND, those who are fighting the “good fight” to save what they can, and those who have lost the fight!
    Instead of having all those fancy dinner parties, EVENTS, etc to impress those who really aren’t impressed…instead of spending $1,200 for a toilet seat, etc…..sit on a toilet like everyone else, instead of PAYING and SUBSIDISING foreigners to come to this country…PROVIDE programs for those of us already here to provide for our own well being and allow us the dignity and integrity to survive. MAKE EVERY CITIZEN OF THIS UNITED STATES…be what a CITIZEN was first established to be….UNITED, WE STAND…DIVIDED, WE FAIL. We are divided and we are failing and dis-honoring those that came before us! You can only live off the accomplishments of your predecessors’ so long before…YOU EITHER HAVE TO STAND FOR WHAT’S RIGHT OR LOSE IT ALL!
    Are we still better than the rest….YES! Are we fast falling from the ULTIMATE POWER to a weak and disorganized…PETTY US….YES!
    WE HAVE LOST OUR CORE PRINCIPLES/VALUES…what this great country was built on! The FAT, keep getting fatter….and the ‘common man’ keeps getting thinner!
    What happened to an honest days’ pay for an honest days’ work? What happened to learning to save for the ‘special extras’ instead of going in debt for instant gratification? What happened to using a dish cloth instead of a ‘dishwasher’? What happened to using an old piece of clothing for a cleaning rag instead of paper towels? And…what is so terribly important that you have to keep a CELL PHONE as a permanent fixture to the day/night…that it can’t wait till you get to a land-line/home. We have gotten so FULL OF OURSELVES that we’ve created a lifestyle we can’t keep up with….nor AFFORD! We have “out-sourced” ourselves to where we have no JOBS….we have borrowed from every country that will lend us money, etc….IT’S A ROUSE! We’ll be lucky to get out of this as less than a third world country!
    My Mum traveled all over the world because my Gram scrimped and saved ALL HER LIFE…allowing Mum to visualize her dreams. To be able to ENJOY LIFE! And MUM DID! She bought what she wanted, traveled….and seen so many things that I’m sure Gram would have loved to have seen. But, there wasn’t a country Mum went to that she didn’t hear….’If you want to GIVE us something, Great! But, not ask us to back anything your country chooses to do.” WE…US…. The UNITED STATES…have assumed the position of coming to everyone else’s’ aid/protection/safety….BUT, somewhere along the path…WE have forgotten that CHARITY BEGINS AT HOME! We are at that PLACE…NOW! Allies are few and because we can’t come to an agreement about the Fiscal Cliff because of the STUPID ‘AFFORDABLE HEALTH CARE’…
    Which brings me to YET another issue! When people, normal citizens of this FINE COUNTRY are having to choose between paying a mortgage, car payment, rent, GROCERIES…JUST PLAIN and SIMPLE basics of seeking the ‘American DREAM’ are EXPECTED….not, government enforced, health care. Get rid of the subsidized healthcare for all those who live off of government siphon instead getting up and working every day. If they can’t show proof of income, or at least the serious effort, TOUGH SHIT! Get rid of the dead-beats (as Obama calls them), the women who have babies one after another because it increases their food stamps and benefits, make a MAN responsible for what he created…whether it was a one night stand or he thought he was IN LOVE! What about the senior citizens, sure they are no longer OF USE but they have put in their time and hard labors! What about those who have fought for our freedom….but don’t qualify for any help. What about all the widows who have loved, supported and cared for their families…who don’t qualify for SHIT but a $250 benefit (that you now have to apply for personally) to bury the one we dedicated our life to and a measly $5oo deduction on our property taxes! What the hell is that? All the while, NEW immigrants are given a monthly siphon and are tax free for 10+ years! CHARITY begins at HOME…we have forgotten or just don’t give a shit about those who have made this country what it once WAS!
    As it is NOW….I’m having to choose between OTC medications to relieve my pain and health issues or something to eat or pay my bills! Just exactly…where am I going to find the money to pay for a government required health insurance? If I get insurance…$90-$150/mo….(just exactly what part of my ass I’m going to pull that out of)…I can’t afford to go to the doctor…because I can’t afford the co-pay….let alone the medications they prescribe. And lets take it a step farther…If I don’t get this ‘AFFORDABLE’ insurance; I’m FINED…$90+! WTH!!!! I don’t have a ‘money tree’ in my back yard or a Swiss Bank Account…Just EXACTLY….TELL ME…where am I going to find the money….LIKE A GREAT PERCENTAGE OF THE UNITED STATES POPULATION? So, let’s say, I get this “affordable insurance” that I can’t afford or afford to use…that means I can’t even afford the homeopathic or OTC meds to offer me some quality of life. So, TELL ME…is this what our country was established and built on? Help me out here…I don’t see it.
    There has got to be a valid reason that a group of people, Republicans, are objecting, refusing to approve the monies to continue to pay this country’s debts till the end of the year. There has got to be a reason that they are using this ‘power play’ to bring ‘Obama Care’ to the fore-front!
    Any logical person would say, “Let Obama Care go up for review for another year.” Cut thru the egos and bullshit! What’s another year, who knows….we may be in a better place and can afford yet another bill…we can’t pay. There’s got to be something very wrong with ‘Obama Care’ that we….the citizens of this United States….are not privy to…that will be a detriment in the long term. How many times have you bought into an idea/concept/theory…only to find out in the long term…it wasn’t what it was presented to be? Just saying.
    How can ONE MAN…who’s suppose to represent each and every individual of this United States tell the people he’s suppose to speak for…that he’s going to stand his ground ….regardless whether it destroys all WE and our ANCESTORS have created? How can ONE MAN be so arrogant to say …his way is the ONLY WAY….and the Hell with everyone else?
    It’s about time….LONG OVER DUE….that WE, the PEOPLE of this United States….begin to take back what we/our ancestors…have worked by the sweat of their brows and gave their lives to BUILD! To be DICTATED by ONE MAN…What the hell is that? We put him in office. If he’s not doing the job we want him to do…IMPEACH HIM! WE NEED TO STOP BEING CATTLE LED TO SLAUGHTER! Find that back bone that this country was built on, stop letting those who have lost the principles that this country was founded on control our lives, get back to our ‘core principles’ and re-build what this country stands for!
    Shelf Obama Care for a year…not saying do away with it, I’m sure it has it’s good points…re-evaluate it’s structure, benefits, and what is truly ‘affordable’ for EVERYONE. Better yet, give US the FREEDOM to CHOOSE if we can afford it to begin with…not saddle us with YET another bill we can’t pay…by MAKING IT MANDATORY! What has happened to what our constitution is all about…FREEDOM to choose. Obama Care takes away that FREEDOM.
    Just saying….how can ONE MAN be totally right and a group of representative be so wrong…there is so much more to this picture than is being revealed.
    We have lost so many FREEDOMS….some subtle, some not so much…This is the United STATES, DAMN IT….our ancestors came to this country because it offered a better way of life, freedom to make our own futures, freedom to worship, freedom to LIVE.
    As with so much loss of freedoms we have come to be complacent about…so we lose that privilege, no big deal….NOW it’s forced healthcare…whether we can afford it or not….what next? Our Lord and Savior? Just saying….You give an inch….and before you know it….you’ve lost a mile!

  2. 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!!!

  3. 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 audience mad about a small tax on the middle class, and maybe you can get the repeal of a much larger tax on the rich.

    The response to Goodman on his own blog is much different, so far, than the response on this blog. An object lesson is there somewhere.

    Bob Hertz, The Health Care Crusade

  4. 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 base and lower rates in order to both simplify the tax code and make it and the economy more efficient. The same goes for the increase in the threshold from 7.5% to 10.0% of income before out-of-pocket medical costs can be deducted from income for tax purposes.

    The new 3.8% Medicare tax on investment income is long overdue in my opinion. Indeed, I think the long term capital gains rate should be 28% which was the rate under the 1986 Tax Reform Act passed when Ronald Reagan was President. At the very least, it should be part of the income base to which the Alternative Minimum Tax (AMT) applies. The same rules should apply to qualified dividends as well which were taxed as ordinary income until 2003.

    The new taxes on drugs and devices will largely be built into the price of those products. Maybe it will encourage payers, especially government payers, to pay closer attention to the cost-effectiveness of drugs that are no better than others in their therapeutic class but much more expensive. Why should we pay whatever drug companies ask for just because the drug won FDA approval after proving that it’s more effective than a placebo?

    If people want the Affordable Care Act, we will all have to pay for it and I would rather see it paid for as the legislation calls for rather than even higher marginal tax rates on ordinary income of upper income taxpayers which are already too high, especially when we include state income taxes in numerous high tax states with large populations including CA, NY, IL, NJ among others.

  5. 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.

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

  7. 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.

  8. 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”?