How Will Obamacare Affect Your Tax Bill?



In these blog posts and in my book Priceless: Curing the Healthcare Crisis, I have focused on the effects of the new healthcare law on quality and access to care. But what about the hidden economic cost to you? Let’s look at some of the taxes that have received too little public attention.

You will join other Americans in paying more than $500 billion in nineteen new types of taxes and fees over the next decade to fund health reform.[1] Some of the new taxes will be indirect and will be passed on to you in the form of higher prices, higher premiums, or lower wages. You will pay other taxes directly. According to the Joint Committee on Taxation, about 73 million taxpayers earning less than $200,000 will see their taxes rise as a result of various health reform provisions.[2]

Tax on Medical Devices

These taxes will reach everything from surgical instruments and bedpans to wheelchairs and crutches. Even pacemakers and artificial hips and knees are taxed. All told, the tax on medical devices will collect nearly $20 billion over the next decade.

Tax on Insurance

A $60 billion tax on health insurance, beginning in 2014, will ultimately be reflected in higher premiums. For example, the Senate Finance Committee’s Republican staff estimates the new taxes—including taxes on medical devices, taxes on drugs, taxes on insurers—could ultimately push up health insurance premiums for a typical family of four by nearly $1,000 per year.[3]

Tax on Drugs

A new tax on drugs will collect about $27 billion. In anticipation, some drug makers have already started raising their prices.[4] These taxes and the changes in the treatment of medical savings accounts have been called the “medicine cabinet tax.”

Tax on Medical Savings Accounts

If you have a Flexible Spending Account, a Health Reimbursement Arrangement (HRA) or a Health Savings Account, you are no longer able to use these tax-free accounts to purchase over-the-counter drugs. That means you will have to buy such items as Claritin, aspirin, or Advil with after-tax dollars (making the cost to you 30 percent higher or more for a middle-income family). In addition, tax-free contributions to an FSA will be capped at $2,500 annually. People setting aside funds for chronic care, corrective eye surgery, or other out-of-pocket medical expenses will be limited to $2,500, regardless of medical need. Taken together, these two actions are expected to cost consumers $18 billion over the next decade.

Taxes on Indoor Tanning

If you plan to use an indoor tanning bed, expect to pay 10 percent more thanks to a new excise tax expected to raise nearly $3 billion.

Taxes on Cadillac Plans

A 40 percent excise tax will be levied on so-called “Cadillac” health plans for the amount in excess of $27,500 for families and $10,200 for single coverage. About one-third of health plans will be subject to the tax beginning in 2019. But since these thresholds are not indexed to increase as fast as medical costs, over time virtually all plans will be subject to the tax.

Taxes on Illness

If you have a lot of medical expenses, today’s tax law allows you to deduct from your taxable income the amount that exceeds 7.5 percent of your adjusted gross income (AGI). Under the new law, this threshold is being raised to 10 percent of AGI—making your deduction smaller.[5] The increase is effective in 2013 for people under 65 years of age and in 2017 for those 65 years of age and older.

Additional Taxes on Wages, Investment Income, and Even Home Sales

The Medicare payroll tax will increase by almost one-third for some people—from 2.9 percent today to 3.8 percent on wages over $200,000 for an individual or $250,000 for a couple. In addition, the 3.8 percent Medicare payroll tax will be levied on investment income (capital gains, interest, and dividend income) at the same income levels. This tax is not only on the rich, however. Under some circumstances, the sale of a house could trigger the provision, making you “paper rich” for a single year and forcing you to pay a 3.8 percent levy on a portion of the appreciated value above a certain limit. Moreover, the threshold above which people must pay the higher tax is not indexed to rise with inflation. Consequently, over time more and more middle-class Americans will have to pay it.
Notes:

  1. Douglas W. Elmendorf, “Analysis of the Major Health Care Legislation, Enacted in March 2010,” Testimony before the Subcommittee on Health, Committee on Energy and Commerce, U.S. House of Representatives, March 30, 2011, http://www.cbo.gov/publication/22077.
  2. Keith Hennessey, “How Would the Reid Bill Affect the Middle Class?” December 10, 2009, http://keithhennessey.com/2009/12/10/reid-bill-middle-class/.
  3. Joint Economic Committee, “Unwinding ACA,” April 22, 2010, http://jec.senate.gov/republicans/public/?a=Files.Serve&File_id=1d63d12d-0e1b-45ee-8633-e3624a8ddcd4.
  4. Duff Wilson, “Drug Makers Raise Prices in Face of Healthcare Reform,” New­ York­ Times, November 15, 2009, http://www.nytimes.com/2009/11/16/business/16drugprices.html.
  5. Kelly Phillips Erb, “Deduct This: The History of the Medical Expenses Deduction,” Forbes, June 20, 2011, http://www.Forbes.com/sites/kellyphillipserb/2011/06/20/deduct-this-the-history-of-the-medical-expenses-deduction/.

[Cross-posted at Psychology Today]

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