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ObamaCare’s Fiscal Cliff

Written by John C. Goodman

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Did you notice that in the standoff over the fiscal cliff, all the discussion was about the Bush tax cuts? Which ones would be made permanent? And for whom? There was no discussion about the ObamaCare tax increases. 

I think that was a huge tactical mistake on the part of the Republicans.

Over and over again, President Obama claimed he was trying to protect the middle class from higher taxes. It was a claim that went unchallenged ― by the Republicans and by the mainstream media.

Yet five of the tax increases Americans are facing this month are new taxes created under the Affordable Care Act (ObamaCare). Three of the five will hit people who are solidly middle class.

Next year, things will get worse. The new tax on health insurance is about as regressive as a tax can be. It will total $100 billion over the next 10 years and very little of that amount will be paid by anyone who can be called “rich.”

 

Everybody knows the fight was fixed .....The poor stay poor, the rich get rich

The ObamaCare taxes that kick in this month will hit everything from dividends and capital gains to day care and services for special needs children. They will increase the tax bill for those who have extraordinary medical expenses ― at the very time when they can least afford to pay higher taxes. They will hike the tax burden for the chronically ill who have several thousand dollars of out-of-pocket prescription drug expenses every year. The taxes will fall on medical devices ranging from pacemakers and artificial hips to bedpans and stents.

All told, these new taxes will create a burden in excess of $250 billion over the next 10 years.

The case for delaying these taxes is strong. Clearly they will depress economic activity and slow the recovery. But there is also another reason: we don’t need the money. The new ObamaCare taxes are supposed to provide the revenue to furnish subsidized health insurance to millions of people who will begin buying it in health insurance exchanges in January 2014. But the subsidies won’t be needed if the insurance is not available, and it won’t be if the exchanges are not up and running at that time.

Here is my prediction: aside from two states that already have exchanges (Massachusetts and Utah), only one other state (Maryland) will make the deadline. Maybe Colorado and California will make it if they are lucky. But that’s it. No other state is going to have operational exchanges on time.

In fact, half the states aren’t even planning to set up exchanges. That responsibility will then fall to the federal government. But no money has been budgeted to fund such a large federal operation. The full implementation of ObamaCare could actually take years. In the meantime, let taxpayers keep more of their income to meet their own needs.

Here is a brief summary of the taxes that kick in this month, courtesy of Americans for Tax Reform.

Medical Device Tax: $20 Billion

This 2.3% tax on gross sales could amount to a very large percent of after tax profit ― thus encouraging an industry that is providing very good domestic jobs to relocate overseas. Meanwhile, the burden of the tax will be reflected in higher prices for anyone who needs an artificial knee or hip or a pacemaker.

Flexible Spending Account (FSA) Limits: $13 Billion

Roughly 35 million Americans use FSA accounts to pay medical expenses not paid by the employer’s health insurance with pre-tax dollars. These accounts are especially important to chronic patients with substantial out-of-pocket drug expenses. FSAs can also be used to pay for day care and services for special needs children. Currently, there is no legal limit on how much an employee can deposit in the account, but many employers cap the annual contribution at $5,000. After January 1, however, contributions will be limited to $2,500 ― effectively cutting the tax advantage in half.

Surtax on Investment Income: $123 Billion

Democrats often say they merely want to return to Clinton era tax rates for the highest-income taxpayers. They conveniently omit the fact that ObamaCare adds 3.8 percentage points to those rates ― bringing the highest marginal tax rate up to 43.4% for individuals making more than $200,000 and couples earning above $250,000. Add on a 13% state tax in California and some taxpayers will be paying more than half of all they earn to the government. The new tax hits dividends, capital gains and other investment income.

Limits on Itemized Medical Expense Deductions: $15.2 Billion

Currently, people can deduct medical expenses in excess of 7.5% of income if they itemize. Next year, that threshold will rise to 10%. This means a higher tax burden for those who have the misfortune to have large medical bills. It is literally a tax on the sick.

Higher Payroll Tax: $86.8 Billion

The Medicare payroll tax is currently 2.9% on all wages and self-employment profits. Under this tax hike, wages and profits exceeding $200,000 ($250,000 for a couple) will face a 3.8% rate instead. This is a direct tax hike for small business owners, who are liable for self-employment taxes in most cases.

John C. Goodman John C. Goodman is President of the National Center for Policy Analysis, Research Fellow at the Independent Institute, and author of the bookPriceless: Curing the Healthcare Crisis.  

The Wall Street Journal and the National Journal, among other media, have called him the “Father of Health Savings Accounts.” Dr. Goodman’s health policy blog is the premier right-of-center health care blog on the Internet. It is the only place where pro-free enterprise, private sector solutions tohealth care problems are routinely examined and debated by top health policy experts across the ideological specturm.

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