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Regardless, You’ll Pay More
Cliff or no cliff, taxes will go way up next year because of Obamacare.


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Michael Tanner

It has largely gone unnoticed amidst the hullabaloo surrounding the fiscal cliff, but regardless of what happens with the cliff negotiations, taxes are going up next year. The president may be calling for $1.6 trillion in tax hikes by 2022 in exchange for not driving the country over the cliff, but that does not count Obamacare, which will impose an additional $1 trillion in new or increased taxes over the next ten years, a big portion of which take effect in 2013.

For example, we’ve heard a great deal about President Obama’s demand that taxes go up for individuals earning $200,000 per year or families making more than $250,000. But under Obamacare, those families will already be hit with a 0.9 percent hike in the Medicare payroll tax on earnings over these thresholds starting January 1. Roughly 3 million Americans will end up paying more as a result of this hike, which is projected to raise $86 billion. And while $250,000 per year may seem like a great deal of money to most people, many of those earners are far from rich. Indeed, in New York City, for example, a teacher married to a police officer could fall into that bracket.

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In addition, those families will now also have their interest, dividend, and capital-gains income subject to the 3.8 percent Medicare tax, a $123 billion hit to the economy. At a time when the economy desperately needs more risk-taking and investment, we are about to make it harder for entrepreneurs to put their capital to work. And this tax will also fall heavily on many small businesses.

Moreover, it is important to realize that this tax hike would come on top of the tax hikes that President Obama is seeking as part of the fiscal-cliff talks. If the president were to get the tax increase on “unearned income” that he is currently demanding, adding Obamacare’s tax hikes on high-income Americans would bring the total tax on interest and dividends for these people to 43.4 percent, while the tax on capital gains would hit 23.8 percent. Talk about falling off a cliff.

Perhaps the next time that President Obama gives yet another speech about how the rich are not paying their fair share, he might at least pause to point out that their taxes are already going up.

Of course, it is not just the “rich” who will be hit with Obamacare taxes next year. Nearly 30 million workers, most of them middle-class, currently participate in Flexible Spending Account programs at work. Next year, the maximum tax-exempt contribution to those accounts will be cut in half, from $5,000 to just $2,500. That change will hit nearly 5.7 million workers who currently exceed the $2,500 cap, and will now have to pay more of their medical bills with after-tax dollars.

Middle-class workers will also be among the biggest losers from the changes that Obamacare imposes on tax-deductible medical expenses. Currently, Americans can take a tax deduction for medical expenses above 7.5 percent of their adjusted gross income (AGI). According to the most recent IRS data, 6 percent of all taxpayers, 7.5 million Americans, took advantage of this provision. But starting next year, that floor will be raised to 10 percent of AGI, meaning that millions of middle-class workers will lose this deduction. Among those most likely to feel the pinch are older and sicker workers, especially older workers and near-retirees with limited incomes but high medical bills. For a family with an adjusted income of $80,000 per year and medical expenses of just under $8,000 per year, a not uncommon situation, this amounts to a $500 tax hike.

The government expects to raise $40 billion from these two Obamacare provisions, but workers will be left poorer.

Workers will also be indirectly socked with the cost of Obamacare’s new business taxes. For example, next year there will be a new 2.3 percent excise tax on medical-device manufacturers. Especially pernicious, this tax is assessed against a firm’s total revenue rather than its adjusted income, making the real impact far greater than for a traditional income tax of the same size. While the industry’s 360,000 employees could pay the highest price in lost jobs and lower wages, all of us could end up paying more in higher medical costs, as much of the tax will be passed on in higher prices. We can expect everything from pacemakers to wheelchairs to become more expensive.

All of this is only round one of Obamacare’s taxes. Another wave of Obamacare tax hikes will hit in 2014, including the individual-mandate “tax,” courtesy of John Roberts, that is expected to fall on as many as 6 million workers, as well as the tax accompanying Obamacare’s employer mandate. There will also be another batch of business taxes, including some levied on hospitals and insurers. Notably, there is a new assessment levied on health plans for three years starting in 2014, designed to raise $25 billion to cushion health-insurance companies from the costs of covering people with pre-existing conditions. This just-announced fee, which will start at $63 per person and fall on employer and individual health plans covering an estimated 190 million Americans, appears to be the latest invention of the far-reaching discretion granted to HHS under the health-care law. HHS has also recently announced that it has given itself the power to impose a 3.5 percent premium tax on insurers who participate in Obamacare’s federally run insurance exchanges.

And farther down the road lurks the 40 percent excise tax on “Cadillac” insurance plans. That tax will hit in 2018.

That amounts to a lot of taxes — even without the fiscal-cliff hikes — which would be bad enough even if it paid for Obamacare. But, of course, it doesn’t. If one accounts for all of Obamacare’s costs, such as implementation costs that are “authorized but not appropriated,” and eliminates double counting of Medicare savings and other bookkeeping games, Obamacare will add roughly $1.5 trillion to the debt over the next ten years — coincidentally, almost as much as President Obama is seeking in non-Obamacare tax hikes.

More taxes, more debt: Welcome to the other cliff.

— Michael Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.



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