Last week, we talked about tax increases that could occur as a result of the “fiscal cliff” if Congress does nothing. What readers should know is some taxes, however, are already scheduled to rise as a result of the Patient Protection and Affordable Care Act.
While much of the public awareness around this legislation focuses on mandatory health care insurance, there are serious tax implications in the measure that will go into effect next year. High income earners — individual taxpayers making $200,000 or couples earning at least $250,000 — with dividend and capital gains taxes will be hit with an additional 3.8 percent tax on that income to fund Medicare. In addition, these taxpayers will see their share of the Medicare tax on their wages rise by 0.9 percent, which when added to the current 1.45 percent paid by all wage earners, will make that tax rate 2.35 percent. While employers’ share for Medicare on high-wage earners will remain at 1.45 percent, the combined tax rate will rise to 3.8 percent, which is the same rate these taxpayers will pay on dividend and capital gains income. This tax increase is expected to raise $317 billion over the next 10 years.
Manufacturers of medical devices will be required to pay a tax equivalent to 2.3 percent of their gross sales. It is estimated this tax will raise more than $29 billion over the next decade. Of course, those manufacturers will pass the costs on to their customers, increasing the price paid for medical care.
Taxpayers with flexible spending accounts will be limited to an annual contribution cap of $2,500 with which to cover out-of-pocket medical expenses. Currently, there is no limitation on pretax contributions to flexible spending accounts used for medical expenses. It is estimated this will raise $24 billion over the next 10 years.
One increase won’t come in the form of a new tax or rate hike. It will come in the form of a higher threshold for itemized deductions taxpayers can take for medical expenses made during the year. All taxpayers can currently deduct any medical expenses made during the tax year as long as they are in excess of 7.5 percent of their adjusted gross income. Under the Patient Protection and Affordable Care Act, that threshold will rise to 10 percent. In other words, taxpayers will be able to deduct only those expenses that exceed 10 percent of their adjusted gross income. This change is expected to raise $19 billion over the next decade.
Finally, on Jan. 1, the amount a health insurance company can deduct for compensation paid to its executives and directors will be substantially reduced. While it doesn’t sound like much, this change is estimated to raise $800 million over the next 10 years.
Some other changes adopted under this legislation have already gone into effect, such as increased penalties for unqualified withdrawals from health savings accounts and Archer medical savings accounts. An interesting provision that levies a 10 percent excise tax on tanning bed services went into effect on July 1, 2010. An annual fee on drug manufacturers went into effect in 2011.
But that is not the end of the taxes and fees adopted under the Patient Protection and Affordable Care Act. A new annual fee on health insurers will kick in beginning in 2014, as well as a 40 percent tax on expensive health plans that will go into effect in 2018.
The fact that all these tax increases have been adopted and will go into effect Jan. 1 makes the “fiscal cliff” even more frightening. Will the nation be able to withstand even more taxes on top of those that will come with Obamacare? While many of these tax increases are hidden from the public, they, nonetheless, will add to the cost of living for all taxpayers. That is why it is so important taxpayers understand the gravity of what faces Congress in the next few weeks. While everyone seems to agree it cannot be all spending cuts or all tax increases, policymakers need to be sensitive to the burden already borne by American individuals, families and businesses. And if policymakers think they can just make wealthy taxpayers pick up the tab, they should remember those who have those resources can also choose where to invest their riches.
No one will come out of this crisis unscathed. Taxpayers need to realize someone has to pay for programs and services the federal government has increased over the years. Now is the opportune time to rethink how much federal government we really need and for which we are willing to pay.
Lowell L. Kalapa is the president of the Tax Foundation of Hawaii.
