$1 Trillion in New Taxes from Health Reform Is Coming
Life + Money

$1 Trillion in New Taxes from Health Reform Is Coming


Three years after enactment of the landmark legislation extending health care coverage to 27 million uninsured people, many in Congress and a majority of Americans are coming face to face with a daunting reality.  Consumers will face higher insurance premiums, insurers will see a 32 percent increase in medical claims costs, and almost everyone in the upper middle class or higher will pay a slew of new taxes. 

The projected 32 percent hike in medical claims, based on a new report out Tuesday, is the latest bit of bad news for President Obama’s signature health care reform law. That’s likely to boost premiums for at least some Americans purchasing individual plans as the health care reform law continues to take hold. Millions of now-uninsured people will be covered as the market for directly purchased insurance more than doubles with the help of government subsidies. But costs will rise because spending on sicker people and other high-cost groups will overwhelm an influx of younger, healthier people into the program.

The report by the Society of Actuaries could turn into a big headache for the Obama administration at a time when many parts of the country remain skeptical about the Affordable Care Act.

The Senate’s vote last week to strike down a new sales tax on medical devices was a feel-good measure directed at manufacturers but with no  practical effect. As an amendment to the fiscal 2014 budget, the repeal lacked the weight of law.

The 79-to-20 vote did signal growing displeasure among Republicans and Democrats alike with President Obama’s Affordable Care Act and the $1 trillion of new taxes it will generate over the coming decade.

Many legislators and voters alike oppose the law, even while strongly supporting some of its provisions – such as allowing children to stay on their parents’ insurance until age 26 and requiring companies with 50 or more employees to provide insurance.

While much of the controversy over health care reform has centered on Medicaid expansion efforts and an “individual mandate” to  force the uninsured to purchase health insurance or pay a penalty, the impact of the new tax provisions on businesses and individuals has begun to attract more attention.

Congressional Republicans have repeatedly called for the repeal of the Affordable Care Act, arguing that its new rules and taxes will have a “devastating” effect on the health care industry and could push the economy back into a recession. Freshman Sen. Ted Cruz, R-Tex., offered an amendment to the Senate budget last week that would overturn the health care reform legislation– the 36th time that a Republican has introduced such a measure in the chamber.

The Democratic-controlled Senate defeated the Cruz amendment, but the GOP-controlled House recently approved its version of the 2014 budget with a provision to eliminate Obamacare. House Budget Committee Chairman Paul Ryan, R-Wisc., warned the law will add more than $1.2 trillion in spending to the federal balance sheet in the next decade while imposing onerous taxes on businesses and individuals to pay for it. “The Affordable Care Act, with insurance exchange subsidies and Medicaid expansion, accelerates the trend of ever-increasing marginal tax rates on lower income individuals,” he said in his budget document.

Ryan’s budget touched off a flurry of competing views and false claims about the law’s set of taxes. Sen. Ron Johnson, R-Wisc., declared that there’s “$1 trillion in middle-income tax increases” in Obamacare. Rep. Debbie Wasserman Schultz of Florida, head of the Democratic Congressional Campaign Committee, responded on a Sunday talk show that “there are not $1 trillion in taxes in Obamacare,” calling Johnson’s claim “completely untrue.” Both lawmakers were wrong.

The nonpartisan Congressional Budget Office has projected the new law will generate $1 trillion of new tax revenue between 2013 and 2022, contradicting Wasserman Schultz’s assertion. As for Johnson’s claim about taxes largely falling on the middle class, liberal and conservative experts agree that the new taxes target high-income taxpayers, employers who fail to provide health care to their employees, and health care companies, including drug and medical device manufacturers and insurance providers.

According to Paul N. van de Water, a senior fellow and health care expert at the liberal leaning Center on Budget and Policy Priorities, the new health and tax policies will “significantly strengthen our nation’s economy.”

“Some provisions will encourage consumers to be more cost sensitive in purchasing health insurance and health care services,” he said in recent testimony. “Among these provisions are the inclusion of the cost of employer-sponsored health coverage on W-2 forms, the excise tax on high-cost employer-sponsored coverage, and limitations on the use of tax-advantaged accounts to pay for health-related expenses.”

Joseph Antos, a health care expert with the conservative American Enterprise Institute, said that if anyone is disproportionately nicked by the health care reform law, it is wealthier individuals and families. “Certainly the big taxes – the ones that bring in the most money – are clearly aimed at people with incomes over $250 K or $250 K,” Antos told The Fiscal Times.

A good example is a measure that will broaden the Medicare Hospital Insurance (HI) tax base for high-income earners.  Under the current law, salaried workers pay a tax on their wages to support the Medicare hospital trust fund, but wealthier people with substantial interest income or dividends do not pay HI taxes on that income. The Affordable Care Act will raise the tax rate by 0.9 percent from the current 1.45 percent on married couples filing jointly who make more than $250,000 a year and unmarried taxpayers earning more than $125,000 a year.

That measure alone will raise $318 billion in new tax revenue over ten years, according to CBO and the Joint Committee on Taxation – or nearly a third of the overall tax increases called for in the legislation.

Beginning in 2018, the new law will also impose a 35 percent excise tax on employer-provided health plans that exceed $10,200 for individual coverage and $27,500 for family coverage.  Currently, there is no limit to the tax deductions employers can claim for providing health insurance to their workers. This new provision – designed to raise $111 billion over ten years – would  be a roundabout way of imposing a cap. It also would discourage employers from offering their workers more expensive insurance policies

The law also requires insurers to spend between 80 and 85 percent of every premium dollar on medical care, rather than on administrative costs and advertising. If insurers exceed that, they have to rebate the excess to their customers. Insurers are expected to rebate $1.1 billion this year alone, according to one report.

Antos said the impact of penalties or new taxes on insurers is hard to assess because their “reaction ultimately is to spread any additional costs [they incur] over the insured population.”

Once the law is fully implemented, it is expected to generate $55 billion in penalty payments from the uninsured individuals and $106 billion of penalty payments from employers over the coming decade, according to the CBO and Joint Committee on Taxation.