The Taxman Cometh…

Now that President Obama’s signature healthcare law has been judicially settled, right or wrongly, as a constitutional law, it is an opportune time to examine the practical economic impact that this legislation has ushered in according to Title IX (and applicable amendments) of the Patient Protection and Affordable Care Act of 2010 (PPACA).

 

Direct Taxes

1.  The “individual mandate” tax/penalty.   By now virtually everyone knows that healthcare is legally required simply for existing in America (unless you happen to be an illegal alien).  For all practical purposes, the individual mandate is actually a universal income tax increase for all working families and individuals of 1% starting in 2014, and ultimately rising to 2.5% in 2016 (there are provisions for alternative “penalties” under Title 26 of the Internal Revenue Code).  To avoid this income tax, one must prove during annual tax filings that a minimum degree of healthcare coverage has been purchased (or exhaustively sought with no success).  If the truth is to be told, there is no avoiding the tax; one either pays it to the Treasury or pays it directly to a commercial health insurance provider.

2.  The corporate mandate tax/penalty.  Starting in 2014, employers that are large enough to qualify (at least 50 full-time employees) must provide health insurance to their employees or face a similar tax/penalty as described above.  This tax equates to a $2,000 or $3,000 fine per employee (depending on the formulation) if even a single employee goes uninsured or underinsured.

Already such a behavior modification tax that is not based on sound free market principles creates a moral hazard for large businesses, imperiling current employer-offered healthcare coverage plans.  This is because in some (perhaps many) cases even the $3,000-per-employee fine is less expensive than maintaining healthcare for them outright.  These same companies that are dropping health insurance plans now did not do so when the free market need to recruit quality employees was the sole governing factor in the equation.  The introduction of a government “fallback” plan is an encouragement for businesses to disregard compensatory benefits in their employment/recruitment offers.

3.  The investment income “surtax.”  In 2013, capital gains taxes (those assessed on investments such as real estate sales and 401(k) plans) are due to elevate from 15% to 20% and the peak dividend rate (such as on savings accounts or public company investments) raises from 15% to 39.6% in accordance with existing law.  The PPACA will additionally raise these rates by 3.8% each, to 23.8% and 43.4% respectively.

4.  The tax on unqualified distributions from HSAs and Archer MSAs.  Already Health Savings Accounts and Archer Medical Savings Accounts, two types of personal savings plans intended to cover/offset health expenses (particularly deductibles), have already seen their nonqualified distribution taxes increased to 20% from 10% and 15%, respectively.

5.  The branded prescription drugs tax.  Manufacturers and importers of name brand prescription drugs sold to government entities/programs (e.g., Medicare, Medicaid, Tricare, etc.) started incurring an annual tax fee in 2012.  This tax incrementally ranges between 10% for at least $5 million in sales to 100% for anything surpassing $400 million in sales.

6.  The medical device tax.  Starting in 2013, an annual tax fee will be levied on medical device manufacturers and importers, equating to 2.3% of the gross prices of the item(s) sold.

7.  The health insurance provider tax.  In 2014, health insurance providers will find themselves assessed a tax fee starting at 50% for net premiums that exceed $25 million.

8.  The “high-earner” income tax.  In 2013, individuals earning $200,000 annually and filers earning $250,000 jointly will see their income taxes raised by (at least) 0.9%.

9.  The “Cadillac plan” tax.  Beginning in 2018, businesses will be assessed a 40% “excess benefit” tax on high-cost employer sponsored health insurance plans, also known as “Cadillac plans.”

10.  The tanning tax.  Of course, we cannot neglect the indoor tanning salon sales tax that amounts to 10% of the cost of the service(s) provided.

 

Indirect Taxes

1.  New limit on FSA contributions.  The PPACA places a $2,500 annual limit (adjusted periodically for inflation) on Flexible Spending Account contributions, which has the effect of not only limiting personal planning and responsibility but indirectly raises income tax withholdings by diverting that remaining income to a tax eligible status.

2.  New business reporting requirements.  Given the massive amounts of regulation involved in such a program, the PPACA has dramatically and rapidly increased reporting requirements for businesses.  These reporting requirements are labor and records intensive and of course must be paid for somehow.  Given that they serve only the purpose of facilitating government requirements it is appropriate to characterize them as indirect taxes.

3.  New limit on deductible medical expenses.  In 2013 the threshold for tax deductions applicable to medical expenses incurred during the taxable year raises from 7.5% to 10% of the individual’s overall adjusted gross income.  This essentially reroutes 2.5% of annual income back into the tax eligible status pool.

4.  New limit on health insurance coverage deductions for health insurance providers.  Also starting in 2013, the PPACA imposes a deduction limit of $500,000 on “excessive” healthcare benefits provided by health insurance providers to its very own employees.

 

This is certainly not an exhaustive list but the key takeaway here is that, as has been demonstrated time and time again, there simply is no such thing as a free lunch.  Contrary to what politicians would have us believe, the ability to tax a thing is an outright fallacy.  Governments can only tax people, regardless of deflective attempts to characterize these taxes as only applicable to corporations, health insurance providers, capital gains/dividends, luxuries, “sins,” etc.

Corporate taxes are paid by the consumer in the way of higher prices for the goods and/or services provided; they are paid by the employee in the way of lost or reduced benefits and/or eliminated jobs/promotions; they are paid by prospective employees in the way of lost job opportunities or reduced remuneration; they are paid by the investor in the way of reduced dividends and/or capital gains (and consequently incentives to invest).  Fees assessed on goods are always passed on to the private consumers who use them, and in the specific case of healthcare these added costs are most likely to impact the very folks least able to absorb them, the very people that the law was purportedly formulated to protect in the first place.

The president’s and congress’ promises notwithstanding, the fact of the matter is that American healthcare costs will continue to rise if for no other reason than this piece of legislation did virtually nothing to address the root causes of the inflated costs.  And in any event, all of these fees on health insurance providers, medical devices, and prescriptions drugs cannot be intelligently rationalized to somehow reduce their associated costs.

The respective stake holding special interests collectively won out (again) with the PPACA but this is what most often occurs when a government is not properly limited in role and scope.  If one pays close attention they will no doubt observe that most of these taxes, particularly those directly assessed on individuals (voters), start in 2013 or thereafter…

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