www.WDIO.com

Health Care Tax Hikes for 2013 May Be Just a Start

Posted at: 12/25/2012 8:56 AM
By: RICARDO ALONSO-ZALDIVAR, Associated Press

null

WASHINGTON (AP) — 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 of the options 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 allowed by the government, 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 revenue 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 be three years since Congress passed the health care overhaul, but because of a long phase-in, 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 above $250,000. Projected to raise $123 billion from 2013-2019, it comes on top of other taxes on investment income. And 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 scheduled at the end of the 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, calls the health care law tax increases medium-sized by historical standards. The center, a joint project of the Brookings Institution and the Urban Institute, provides in-depth analysis on tax issues.

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."

Other health care law tax increases taking effect Jan. 1:

Partial list of taxes and fees in health overhaul

Starting in 2014, President Barack Obama's health care law will expand coverage to some 30 million uninsured people. At the same time, insurers no longer will be allowed to turn away those in poor health, and virtually every American will be required to have health insurance — through an employer or a government program or by buying it on their own.

For the vast majority of people, the health care law won't mean sending more money to the Internal Revenue Service. But the wealthiest 2 percent of Americans will take the biggest hit, starting next year.

And roughly 20 million people eventually will benefit from tax credits that start in 2014 to help them pay insurance premiums.

A look at some of the major taxes and fees, estimated to total nearly $700 billion over 10 years.

(Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)