Tuesday, October 5, 2010

Ten Tax Increases of Obamacare

Cross-posted from Critical Condition on National Review Online.

Bob Vineyard of InsureBlog calls our attention to a piece in the Kiplinger letters on “thirteen tax changes on the way” due to PPACA. Describing them as “changes” is charmingly sunny, given that only two of the changes are tax credits—a fancy term for subsidies—whereas ten are tax increases: levies intended to help raise the trillions of dollars necessary to fund these very tax credits, along with the law’s massive expansion of Medicaid. (One of the changes Kiplinger lists is technically neither a tax increase nor a credit, but is designed to enhance enforcement of the tax increases. More on that later.)

In keeping with the spirit with which PPACA was written, let’s focus first on dessert (the subsidies) and then the spinach (the increases). Employers with 25 or fewer employees and average annual wages less than $50,000 are eligible for tax credits for up to 35 percent of their health insurance costs through 2013; for 2014 and 2015, these firms can gain a credit of up to 50 percent of their insurance costs if they enroll in the PPACA-sponsored state-based exchanges. The other tax credit listed by Kiplinger is more directly a subsidy: available on a sliding scale to individuals with incomes between $11,000 and $44,000 ($22,000 and $88,000 for families), for purchasing health insurance.

Here are the ten tax increases:
  1. A 10 percent excise tax on indoor tanning services (a boon to beach towns everywhere).
  2. Elimination of the tax deduction for employers providing Medicare prescription drug coverage. (This is a big part of why companies like 3M are dropping health coverage for their retirees.)
  3. Doubling the penalty for spending money from your tax-free health savings account for non-health-related purposes (as defined by PPACA), to 20 percent.
  4. Capping the amount that employers can contribute to your tax-free flexible spending accounts (employer-sponsored HSAs), at $2,500 a year (it was previously limited by your employer’s generosity).
  5. Banning the use of funds from HSAs and related accounts for the purchase of over-the-counter medications (now you will have to go to your doctor and get a prescription, a waste of precious health-care resources and doctors’ time).
  6. A 0.9% Medicare surtax to wages over $200,000 for individuals and $250,000 for married couples, along with a 3.8% Medicare tax on investment income of these individuals. (The 3.8% tax will actually apply to the lesser of unearned income or any excess income above $200,000/$250,000.) Because this tax is applied to pre-tax income, these taxes are equivalent to income tax rate increases of 2% and 8% respectively.
  7. The ability to deduct itemized medical expenses will begin after you spend 10% of your income on medical expenses, instead of 7.5%.
  8. The employer mandate, which requires that all business with more than 50 employees offer PPACA-approved health plans to all of their employees, or pay a tax of $2,000 per employee, excluding the first 30 employees.
  9. The “Cadillac tax” on high-value health plans: beginning in 2018, plans costing more than $10,200 for individuals, or $27,500 for families, will be assessed a 40% excise tax. Insofar as this tax mimicks the elimination of the employer tax exclusion, it is the least offensive of Obamacare’s tax increases, but unfortunately that policy goal—harmonizing the tax treatment of individually-purchased and employer-sponsored health insurance—is neutered by the employer mandate described above.
  10. And last, but not least: the individual mandate, which requires everyone to purchase health insurance, or pay a tax: it starts in 2014 at $95 or 1% of gross income, whichever is greater; and maxes out in 2016 at the greater of $695 or 2.5% of income.
Importantly, Kiplinger’s run-down overlooks PPACA’s numerous tax increases on health care businesses, as well as its thousands of mandates that will increase the cost of health care and labor, all of which will be passed down to consumers in the form of higher costs for everything from cancer drugs to Big Macs.

For example, the $2.5 billion excise tax on pharmaceutical companies will simply get passed onto consumers: companies will charge $7-8 billion more for their products, in order to recover the income lost to the excise tax. Similar taxes on medical devices and health insurance will be passed onto consumers. And whether your local McDonald’s franchise chooses to offer generous health insurance to all of its employees, or instead pays the new tax for failing to do so, the cost of your Happy Meal is going up.

Kiplinger’s 13th “change” is genuinely a change: employers will now be required to disclose on your W-2s the amount they spend on your health insurance, so as to ensure enforcement of the individual mandate, the employer mandate, and the Cadillac tax.

There’s another change that Kiplinger neglects to mention, but that Bob Vineyard does: the requirement that businesses fill out an IRS Form 1099 every time they spend more than $600 on a single vendor in a calendar year. The increased compliance burdens associated with this rule are staggering, and once again will drive up the cost of everything you buy. As Bob Vineyard puts it:
Business owners are required to generate a 1099 for any vendor where they purchase more than $600 in goods or services. That means if you own a business and buy more than $600 in gasoline, electricity, telephone, internet, cell phone, natural gas or water you must generate a 1099 for those businesses. Buy more than $600 from Office Depot or Staples?

Generate a 1099.

Do you pay a cleaning service to empty the trash in your business? Pay a landscaper? Provide a coffee service for employees and guests?

1099. 1099, 1099.

It will cost you money to generate those 1099's. Money that could have been used to create jobs.
Advocates of PPACA truly believed that Obamacare would become more popular as people came to appreciate the ways in which the law directly benefited them. But P.J. O’Rourke’s immortal aphorism can’t be too often repeated: “If you think health care is expensive now, wait until it’s free.”


  1. The problem is that even WITH reform, it's still a corrupt, "for-profit" system.

    I find it amusing how nobody cares about the crazy escalation of costs prior to HCR, nor do they care that the US lags the developed world in most health categories.

    But you get a black president who enacts reform, and suddenly there is major controversy!

  2. Hi Anonymous,

    I know how you feel -- some of the criticisms leveled at me are from people who aren't comfortable with dark-skinned bloggers:


    But I'm not sure what the President's skin color has to do with health care policy.

    If you become a regular reader of this blog -- and I hope you do -- you will find a lot of commentary on the questions of cost and quality that you raise.

  3. Can somebody please explain to me how the free market health care hasn't increased the cost by 800% since mid 1990's? Wasn't it supposed to bring the prices down? What happened? Didn't we try it, so why didn't work?

  4. This comment has been removed by the author.

  5. Just to append something to my previous post (I should have used a profile name) addressing Anonymous' (October 5, 2010 4:04 PM) post:

    This has nothing to do with race--trust me. You should listen to what these people are saying, a.k.a. Conservatives and their Libertarian sisters and brothers (Tea Party) more carefully. Some of their views might be very misguided, and I'm not talking about certain offered solutions but rather the process in which they reach the conclusions and evidence that they base their premise upon, nonetheless their clamor does not stem from his race.

    What has riled them up is a simple 20-year brainwashing by group of charlatans blowing spiel through various channels, day in and day out without considering the consequences of creating a pitch-fork crowd. Don't get me wrong, true conservatism has a lot to offer, so does sane progressive movement. But they are being driven by the worst of their kind and unfortunately falling for it--the radical left is doing the same. My point is their misplaced rage is not because of the color of his skin but comes from other sources of feigned concerns. Pounding on the race card is as inane as calling Obama an illegal alien.

  6. "Elimination of the tax deduction for employers providing Medicare prescription drug coverage."

    I'm sorry, how is this fair to the rest of us who not only have to pay for the Medicare (part D) coverage of these retired folks (i.e. AT&T's, et al.) but prior to this provision, it would have considered a tax deductible on company's balance sheet so they didn't have to pay taxes on top of taking taxpayers' dough provided to their ex-employees?

    The new legislation closes this loophole and yes, it IS a loophole. I thought the whole brouhaha by the people opposing this bill was due to probable socialization of health care? So why they think such corporate welfare is justifiable?

  7. I thought that Nelson had proposed setting the cutoff for the 1099s at $5,000? Having filled out a few 1009s, it is not much work. With computers, it is even easier.

    "Doubling the penalty for spending money from your tax-free health savings account for non-health-related purposes (as defined by PPACA), to 20 percent."

    Are you suggesting people should be able to spend their tax free HSA money on non health related goods?

    As to the rest of the list, I disagree most with #4. I cannot see why we should limit HSA contributions, as long as they are not just a tax free way to spend the week at a spa. #5 should also go.

    I like #2 if it is doing what you claim. We need to delink health insurance from employment. Even more so for retirees.

    "And whether your local McDonald’s franchise chooses to offer generous health insurance to all of its employees, or instead pays the new tax for failing to do so, the cost of your Happy Meal is going up."

    Couldn't a MacDonald's employee qualify for an individual plan? Also, as I do the math, correct me if wrong, McD could save money. If an employee is spending $32/week for the $10,000 plan, I assume McD is making up the difference somehow. That $8,400 a year is coming from somewhere, or are they getting 80% discounts?


  8. The bottom line is: the government has no business forcing people to buy a product they don't want. If I helped pay for the uninsured doctor's care, so be it. I helped pay for the government officials in D.C. who are screwing me over too. I don't want the government telling me what to buy or not buy.

  9. Anonymous (October 15, 2010 9:08 PM)

    Where can I sign to op out of the mandatory car insurance? Don't tell me it is not a federal law, I can care less. It's a state law and equally represented by one form of government. As a matter of fact all the states have it.

    You cannot also claim that I shouldn't be riding my car because it's a product I want without having to buy an insurance--a product I don't want. So tell me, why is my state forcing me to buy a product I don't want and never needed?

    Once you find the answer to my question, you realize how inane your statement is.

  10. Aria, the auto insurance argument isn't a good one. States mandate auto insurance to protect others from damage your vehicle may cause to others. In most states they call it minimum liability insurance and it only pays for damages of injuries to others. Health insurance is not driven by liability, it's driven by the need to spread individual risk and related costs across as many individuals as possible.

  11. There is no damn surety about the corruption in this because profit matter are not shared with people and the people are also not being facilitated properly.