Health care taxes for 2013 could start trend

Health care

Austin American-Statesman - - FRONT PAGE - By Ri­cardo Alonso-Zaldivar

WasHington — New taxes are coming Jan. 1 to help fi­nance Pres­i­dent Barack Obama’s health care over­haul. Most peo­ple may not no­tice. But they will pay at­ten­tion if Congress de­cides to start tax­ing em­ployer-spon­sored health in­surance, one op­tion in play if law­mak­ers can ever agree on a bud­get deal to re­duce fed­eral deficits.

The tax hikes al­ready on the books, tak­ing ef­fect in 2013, fall mainly on peo­ple who make lots of money and on the health care in­dus­try. But about half of Amer­i­cans ben­e­fit from the tax-free sta­tus of em­ployer health in­surance. Work­ers pay no in­come or pay­roll taxes on what their em­ployer con­trib­utes for health in­surance, and in most cases on their own share of

pre­mi­ums as well.

It’s the sin­gle big­gest tax break the government al­lows, out­strip­ping the mort­gage in­ter­est de­duc­tion, the de­duc­tion for char­i­ta­ble giv­ing and other bet­ter-known ben­e­fits. If the value of job-based health in­surance were taxed like reg­u­lar in­come, it would raise nearly $150 bil­lion in 2013, ac­cord­ing to con­gres­sional es­ti­mates. By com­par­i­son, wip­ing away the mort­gage in­ter­est de­duc­tion would bring in only about $90 bil­lion.

“If you are look­ing to raise rev­enue to pay for tax re­form, that is the big­gest pot of money of all,” said Martin Sul­li­van, chief econ­o­mist with Tax An­a­lysts, a non­par­ti­san pub­lisher of tax in­for­ma­tion.

It’s hard to see how law­mak­ers can avoid touch­ing health in­surance if they want to elim­i­nate loop­holes and cur­tail de­duc­tions so as to raise rev­enue and lower tax rates. Congress prob­a­bly wouldn’t do away with the health care tax break, but limit it in some form. Such lim­its could be keyed to the cost of a par­tic­u­lar health in­surance plan, the in­come level of tax­pay­ers or a com­bi­na­tion.

Many econ­o­mists think some kind of limit would be a good thing be­cause it would force con­sumers to watch costs, and that could help keep health care spend­ing in check. Obama’s health law took a ten­ta­tive step to­ward lim­its by im­pos­ing a tax on high-value health in­surance plans. But that doesn’t start un­til 2018.

Next spring will mark three years since Congress passed the health care over­haul, but be­cause of a long pha­sein, many of the taxes to fi­nance the plan are only now coming into ef­fect. Medi­care spend­ing cuts that help pay for cov­er­ing the unin­sured have started to take ef­fect, but they also are stag­gered. The law’s main ben­e­fit, cov­er­age for 30 mil­lion unin­sured peo­ple, will take a lit­tle longer. It doesn’t start un­til Jan. 1, 2014.

The big­gest tax hike from the health care law has a bit of mys­tery to it. The leg­is­la­tion calls it a “Medi­care con­tri­bu­tion,” but none of the rev­enue will go to the Medi­care trust fund. In­stead, it’s fun­neled into the government’s gen­eral fund, which does pay the lion’s share of Medi­care out­pa­tient and pre­scrip­tion costs, but also cov­ers most other things the government does.

The new tax is a 3.8 per­cent levy on in­vest­ment in­come that ap­plies to in­di­vid­u­als mak­ing more than $200,000 or mar­ried cou­ples with in­come above $250,000. Pro­jected to raise $123 bil­lion from 2013-2019, it comes on top of other taxes on in­vest­ment in­come. While it does ap­ply to prof­its from home sales, the vast ma­jor­ity of sellers will not have to worry since an­other law al­lows in­di­vid­u­als to shield up to $250,000 in gains on their home from tax­a­tion. (Mar­ried cou­ples can ex­clude up to $500,000 in home sale gains.)

In­vestors have al­ready been tak­ing steps to avoid the tax, sell­ing as­sets this year be­fore it takes ef­fect. The im­pact of the in­vest­ment tax will be com­pounded if Obama and Repub­li­cans can’t stave off the au­to­matic tax in­creases coming next year if there’s no bud­get agree­ment.

High earn­ers will face an­other new tax un­der the health care law Jan. 1. It’s an ad­di­tional Medi­care pay­roll tax of 0.9 per­cent on wage in­come above $200,000 for an in­di­vid­ual or $250,000 for cou­ples. This one does go to the Medi­care trust fund.

Don­ald Mar­ron, di­rec­tor of the non­par­ti­san Tax Pol­icy Cen­ter, says the health care law’s tax in­creases are medi­um­sized by his­tor­i­cal stan­dards.

They also fore­shadow the cur­rent de­bate about rais­ing taxes on peo­ple with high in­comes. “Th­ese were an ex­am­ple of the pres­i­dent win­ning, and rais­ing taxes on up­per-in­come peo­ple,” said Mar­ron. “They are go­ing to hap­pen.”

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