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:
- A 10 percent excise tax on indoor tanning services (a boon to beach towns everywhere).
- 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.)
- 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.
- 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).
- 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).
- A 0.9 percent 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 percent 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 percent and 8 percent respectively.
- The ability to deduct itemized medical expenses will begin after you spend 10 percent of your income on medical expenses, instead of 7.5 percent.
- 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.
- 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 percent excise tax. Insofar as this tax mimics 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.
- 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 percent of gross income, whichever is greater; and maxes out in 2016 at the greater of $695 or 2.5 percent 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.”