Politics & Policy

Obamatax’s ‘HIT’ on Small Businesses and Families

Higher taxes on insurance companies mean higher premiums for all.

President Clinton recently created quite a stir when he suggested Congress should act to prevent massive tax hikes that will automatically occur at the end of the year. Even President Obama once admitted that “you don’t raise taxes in a recession.”

Unfortunately, the tax policies in the president’s signature health-care law ignore this advice. The Supreme Court’s decision last week does not change the fact that the scandalous new tax on life-saving medical devices (of all of the new taxes tucked into the law) had received the most prominent attention prior to the Supreme Court’s ruling, most notably when the House recently voted to repeal it.

As we continue to review last week’s sweeping decision and its consequences for the American people, it is worth taking stock of Obamacare, perhaps now better named “Obamatax,” starting with a less-well-known $87 billion tax buried in the law that could force families to pay an extra $500 a year in premiums. The tax is described in the law as an “annual fee” levied on insurance companies. Actually, the fee is really just a tax by another name — the health-insurance tax, or HIT, in this case. Tax economists — inside and outside government — agree that the bulk of new fees and taxes are simply passed by businesses on to their customers, which, as we’ll see, in this case are small employers and families. Unless this tax is repealed, it will soon force families and small businesses to pay even more for their coverage.

Here’s how it works: The law taxes health plans based on their net premiums. Bigger health plans pay more, small plans pay less — or at least that’s how it sounds. But the law’s definition of a “health plan” excludes companies that self-insure. This means that Fortune 500 companies and other large firms who self-insure dodge this tax, leaving the brunt of the tax to fall on small businesses and families.  

As the Joint Committee on Taxation explained, “a very large portion of the insurance industry fee [would] be passed forward to purchasers of insurance in the form of higher premiums.” According to analysis by the actuarial firm Oliver Wyman, this tax could increase premiums for an average family in the small-group market by $6,800 over the decade that starts in 2014. This estimate is in line with other similar calculations. 

Former director of the Congressional Budget Office Douglas Holtz-Eakin arrived at a similar conclusion, pegging the impact at about $500 per family each year. Unfortunately, most of these hardest-hit families are those of least means: low-income or middle-class families. In a new policy paper, Holtz-Eakin explained that “roughly 85 percent of the burden” of this new tax “will come out of the wallets of those making less than $100,000.”

The National Federation of Independent Business found that the rise in the cost of employer-sponsored insurance stemming from the health-insurance tax will result in a reduction in private-sector employment by as much as 249,000 jobs by 2021. Half of this job loss would fall on small businesses.

Not only will this tax pinch consumers’ wallets, it will dampen economic growth. This tax increases costs for small-business owners, which discourages them from expanding their companies, creating jobs, and hiring new employees. Since small businesses create roughly two-thirds of new jobs in America and this insurance tax is one of 17 taxes in the health law, it is no surprise that the research firm UBS has described the health-care law as the nation’s “biggest impediment to hiring.”

Finally, despite President Obama’s pledge not to raise taxes on American families making less than $250,000 annually, the health-insurance tax is a direct hit on the pocketbooks of millions of Americans in that category. Indeed, as the Joint Committee on Taxation confirmed, this tax will be passed on to middle-class Americans.

All of this heads in the wrong direction. At a time when our nation is teetering on the brink of another recession, massive tax hikes that increase health costs are not the answer.

— Richard Burr is a Republican senator from North Carolina. Tom Coburn, M.D., is a Republican senator from Oklahoma and a member of the Senate Finance Committee.


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