The New Healthcare Tax that the IRS Won’t Enforce
Policy + Politics

The New Healthcare Tax that the IRS Won’t Enforce


The Supreme Court has ruled. Health care reform raised taxes.

Of course, it didn’t require a Supreme Court decision to know that. Anyone who read the 955-page bill knew it had numerous revenue raising provisions, a relatively small penalty for failing to purchase health insurance assessed against individuals and businesses (the tax on tanning salons – the Snooki tax – was even smaller).

Politifact, the fact-checking website run by the Tampa Bay Times, last week questioned assertions by some Republican politicians that Obamacare represented a massive tax increase after conservative talk show host Rush Limbaugh told his listeners that it was “the largest tax increase in the history of the world.” Politifact said that hyperbolic statement dwelled “in the realm of the ridiculous” and gave the statement its least coveted “Pants on Fire” award.

The Obamacare tax increase by the time it is fully in effect in 2019 will total just 0.49 percent of gross domestic product, which is roughly equivalent to the tax increases passed by President Jimmy Carter in 1980, President George H.W. Bush in 1990 and President Bill Clinton in 1993, the paper’s website reported. And it will be significantly less than the tax increase signed into law by President Ronald Reagan in 1982, which tipped the balance sheet at 0.8 percent of GDP.

More significantly, unlike those earlier tax increases, a substantial portion of the Obamacare tax increase will be paid by wealthier individuals and businesses. The individual mandate penalty accounts for a tiny sliver of the new revenue – an estimated $27 billion over the next decade or less than five percent of the less than half trillion dollars raised by the bill.

Where does the rest of it come from? According to the Joint Committee on Taxation, which analyzed its ten-year revenue projections in 2010, the bill would:

    • Raise $210.2 billion by raising the Medicare payroll tax by 0.9 percentage points on joint filers earning over $250,000 annually ($200,000 for individuals);
    • Raise $60.1 billion from health insurers through a fee on insurance premiums;
    • Raise $32 billion in 2018 and 2019 alone through the “Cadillac” tax on high-priced insurance plans, defined as plans costing over $27,500 for families;
    • Raise $47 billion through new fees on drugs and medical device companies; and
    • Raise $15.2 billion by raising the point where the medical expense deduction kicks in from $7,500 to $10,000.

Economists argue endlessly over who actually pays a tax levied on corporations (do insurance, drug and device companies hit by the legislation pay the tax or their customers?). Direct taxes on households come to about $284 billion or slightly more than half the total. The lion’s share of that new revenue will be raised from higher-income households in higher Medicare taxes – not those who choose not to purchase health insurance.

Still, Republicans and Democrats focused on that element of the legislation as they renewed their squabbling over the weekend. Republican Senate minority leader Mitch McConnell, R-Ky., told Fox News Sunday that the Supreme Court had unearthed “the massive deception that was practiced by the president and the Democrats, constantly denying it was a tax.” Rejoined President Obama’s budget director Jack Lew: “The law is clear, it’s called a penalty.”

Presumptive GOP candidate Mitt Romney, whose own health plan in Massachusetts contains a similar mandate, agrees with the White House and the Democrats that Obama’s health care mandate is not a tax. “The governor disagreed with the ruling of the court,” Eric Fehrnstrom, Romney’s senior advisor, said on MSNBC’s The Daily Rundown. “[Romney] agreed with the dissent written by Justice Scalia, which very clearly stated that the mandate was not a tax.”

Chief Justice John Roberts got the final word on that subject. “It is of course true that the Act describes the payment as a ‘penalty,’ not a ‘tax,’” he wrote. But “the exaction the Affordable Care Act imposes on those without health insurance looks like a tax in many respects.”

But it certainly wasn’t a broad based tax. The 150 million Americans who receive insurance through their public or private employers do not pay the tax; the nearly 100 million Americans who gets their insurance through Medicaid and Medicaid do not pay the tax; nor will people who pay no income tax, even if they are uninsured, since the legislation has no enforcement power. Only about four million people will choose to pay the tax instead of buying insurance, according to the Congressional Budget Office.

In that sense, the law’s tax/penalty is like the law’s tax on insurers and drug companies. The latter are taxed for what they do; the former – the willfully uninsured – are taxed for what they do not do. “We do not make light of the severe burden that taxation – especially taxation motivated by a regulatory purpose – can impose,” Roberts wrote in the majority opinion. “But imposition of a tax nonetheless leaves an individual with a lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice.”

That’s an argument Congress understood perfectly well when it passed another large tax increase on health care providers last month – one that passed with overwhelming Republican and Democratic support. This other tax will raise $6.4 billion over the next five years from pharmaceutical and medical device companies, according to CBO.

The Food and Drug Safety and Innovation Act nearly doubled the user fees that are paid by every company that submits a new drug or device application or needs to have its manufacturing facility inspected by the FDA. New fees will also be assessed on generic manufacturers and on makers of biosimilars, who won a pathway to regulatory approval of generic biotechnology products through the Affordable Care Act.

Those fees are optional – just like the decision not to purchase health insurance. No one forces a drug company to develop a new drug and pay a fee to have it reviewed by the FDA.

Even conservative critics agree these optional fees are taxes. “Drug and device user fees constitute a discriminatory tax on specific, research-intensive business sectors, a tax that ultimately will be passed along to consumers,” wrote Henry Miller of the Hoover Institution at Stanford University. And they are discriminatory, too. “They disproportionately affect smaller companies,” he said. “The imposition of user fees is a shabby way to fund government activities ‘off the books.’”

Yet the user fee reauthorization legislation passed 92 to 4 in the Senate and 387 to 5 in the House before going to conference, and 96 to 1 in the Senate and on a voice vote in the House after conference. President Obama signed that bipartisan tax increase last week to applause from both sides of the aisle.