Obamacare Taxes and Why They May Be Problematic

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The Affordable Care Act was designed to fill the last gap in insurance coverage left by the expansion of employer-sponsored health insurance amidst the wage freeze of the World War II, and the legislation passed in 1965 as part of President Lyndon Johnson’s “Great Society,” a set of domestic programs that brought health insurance to the poor, older Americans, and the disabled.

In the gap are the 48 million uninsured Americans who were excluded or priced out by the traditional system. Obamacare — as the healthcare reform is known colloquially — made numerous tweaks to the insurance industry under the banner of fair coverage, including requiring insurers to provide a standard set of benefits, prohibiting insurers from excluding those with pre-existing conditions, and limiting the extent to which insurers vary premiums based on age. More importantly, individual exchanges were created to allow consumers to comparison-shop for health insurance policies in online marketplaces, which were designed to give individual customers collective bargaining power that will foster competition and drive down prices. Plus, eligible Americans are now able to qualify for subsidies for insurance policies.

To fund the tax credits that will be distributed to subsidize the cost of health insurance for those Americans earning between 138 percent and 400 percent of the federal poverty level — an income bracket that may include as many 17 million individuals — the federal government is boosting tax revenues by $1 trillion over the next ten years. New tax revenues are also needed to fund the optional state-based expansion of Medicaid. These tax increases were one pillar of the Republican party’s original argument against the passage of the healthcare reform. While the GOP’s stance is framed in the usual anti-big-government drapings, there is very real concern for how the new taxes, subsidized healthcare, and mandated insurance coverage will impact the economy and the American workforce.

New tariffs include the 10 percent tax on indoor tanning services; the elimination of the tax deduction for employers providing Medicare prescription drug coverage; a doubling of the penalty for using tax-free health savings accounts for non-qualified medical expenses; a $2,500 cap on the amount employers can contribute to tax-free flexible spending accounts; a ban on the use of funds from employer sponsored health spending accounts for the purchase of over-the-counter medications; a 0.9 percent Medicare surtax to wages over $200,000 for individuals and $250,000 for married couples — plus a 3.8 percent Medicare tax on the investment income of those individuals; an increased cutoff for the deduction of itemized medical expenses; and, beginning in 2018, high-value health plans costing more than $10,200 for individuals, or $27,500 for families, will be assessed a 40 percent excise tax known as the “Cadillac tax.”

Plus, less noticeable to the average Americans are the new taxes levied on medical device manufacturers, charitable hospitals that do not comply with the requirements of the healthcare reform, name brand drugs, and health insurers. Annual compensation for executives of insurance companies will also be limited at $500,000.

In essence, the employer mandate and individual mandate are taxes as well. Those individuals who do purchase Obamacare-compliant policies will be fined a tax penalty amounting to $95 or 1 percent of income, whichever is greater, in 2014 — an amount that will increase through 2016, when the penalty will stabilize at $695 or 2.5 percent of income. Meanwhile, the Affordable Care Act requires businesses with 50 or more full-time-equivalent employees to provide those workers with a minimum level of health insurance coverage or face tax penalties of as much as $3,000 per full-time employee, excluding the first 30, beginning in 2015. Although a Monday ruling from the Department of the Treasury postponed by another year the mandate for those companies with the equivalent of 50 to 99 full-time employees. In the most basic sense, the healthcare reform is a tax because Obamacare was upheld in 2012 by the Supreme Court as a proper exercise of the federal government’s power to tax.

As early as 2009, before the Affordable Care Act was signed into law, former Republican Senator Jon Kyl of Arizona told current Speaker of the House John Boehner, a Republican from Ohio, that, “The whole concept of the bill, with its government mandates, its taxes, its spending, and all of the other features of it, are what make it unacceptable.” Nearly five years later, in a post to the Republican party’s webpage, the GOP was once again making the argument that the new taxes were unacceptable. Under the heading, “As ObamaCare Rings In The New Year, Americans Will Pay More in Taxes,” several articles were cited; Rachael Bade of Politico wrote at the beginning of January that, “Obamacare’s $8 billion health insurance tax will increase healthcare premiums for health insurance consumers,” while similarly a letter to Senator Tom Coburn from the Joint Committee on Taxation noted that the tax “increases costs for affected health insurance providers and may be passed on to consumers in the form of higher prices.”

Even worse, Forbes contributor and health care expert Avik Roy argued in a February 5 article that, “Obamacare’s $1 trillion in tax increases, which will discourage work and depress economic growth.” That conclusion that was largely based on the Congressional Budget Office’s Budget and Economic Outlook for 2014 to 2024, which included an updated analysis of the “labor market effects of the Affordable Care Act.” The nonpartisan agency found the reduction in the total number of hours worked by the American labor force due to the Affordable Care Act would amount to 2.5 million by 2017.

Yet, the Affordable Care Act — which will enable many Americans to purchase more affordable insurance policies — will influence the “amount of labor that some workers choose to supply,” not the availability of jobs. The CBO’s report specifically stated that the impact of the healthcare reform on employment will not be felt as an “increase in unemployment” or “underemployment.”

According to Roy’s view, those workers who will be able to quit their job or retire early because of the new affordability of healthcare are doing so on the “generosity of other taxpayers,” who pay the new taxes to finance the subsidies, and thanks to the “young people will be forced to pay on your behalf,” in reference to the fact that the elimination of age variations in premium prices will force healthier and cheaper-to-insure individuals to pay proportionally more than older and sicker individuals. The problem is that, “Participation in the labor force was already declining, thanks to the poor economy and the retirement of the Baby Boomers,” wrote Roy. “Obamacare, it appears, will accelerate that process, forcing fewer and fewer taxpayers to support a greater number of government beneficiaries.”

While he argued that it is in fact beneficial for the United States healthcare system to allow “people control their own health dollars and their own health coverage, and aren’t stuck at a job because they’re afraid of losing the coverage they have,” such a reform should not have substituted the opportunity to switch jobs with the ability to drop out of the workforce entirely.

The other problem Roy described is that the $1 trillion tax increase and the generally higher costs of hiring new workers, thanks to the employer mandate, will depress economic growth. The CBO report seems to support that argument, given that the nonpartisan agency predicts economic growth will now be more sluggish than previously forecast, with nominal gross domestic product growth averaging 4.2 percent instead of 4.4 percent from 2018 to 2023 and unemployment averaging 5.6 percent instead of 5.4 percent in the same period. That lower growth led the CBO to estimate that the federal government will receive $1.4 trillion less in tax revenue than it had projected last year.

“Obamacare increased taxes by $1 trillion over ten years. Democrats have passed several other tax hikes under President Obama. And yet all of that planned new tax revenue has been offset by the poor economic growth that the President’s tax hikes, in part, have engendered,” wrote the healthcare expert. To him, that suggested that Obamacare is not a scheme for wealth redistribution but wealth destruction.

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