When it comes to the taxes associated with the new health care bill, Vice President Joseph R. Biden Jr.’s assessment stands: It’s a big — very big — deal.
The historic overhaul of the nation’s health care system that President Obama signed Tuesday, when combined with the fixes making their way through Congress, will raise taxes over the next 10 years by more than a half-trillion dollars.
The tax increases range from hundreds of billions of dollars in new Medicare levies, including one that taxes investment income such as capital gains and dividends for the first time, to a 10 percent excise tax on indoor tanning services that will raise less than $3 billion over the next decade.
Imposing a Medicare tax on investment income “would reduce demand for investment, which is the last thing that the economy needs right now. It would slow [economic] recovery, reduce employment opportunities and hinder wage growth,” said Karen Campbell of the conservative Heritage Foundation. “Less investment, lower investment values and lower wages hinder the ability of households to build wealth.”
Under a procedure that doesn’t require a 60-vote majority for approval, the Senate is considering a package of changes to the new health care law to placate House members’ concerns about the Senate bill, which the lower chamber approved Sunday with no Republican support. Among other things, the Senate must approve the numerous tax-law changes that the House passed in a second bill Sunday to fix the upper chamber’s December proposal.
By far the biggest tax increase — more than $210 billion from 2012 through 2019 —. involves Medicare, the $500 billion federal health care program for the elderly and disabled. Medicare taxes would be raised in two ways.
First, the new law increases the Medicare payroll tax on employee wages and salaries from 1.45 percent to 2.35 percent on earnings above a certain amount — $200,000 for individuals and $250,000 for couples who file jointly. The employer’s share would remain at 1.45 percent for all wages and salaries — creating an effective 3.8 percent tax rate for income in those higher brackets.
Second, for the first time ever, the bill would apply Medicare taxes to several forms of “unearned income” — capital gains, dividends, interest, royalties and other sources besides wages and salaries — above the $200,000 and $250,000 thresholds. The individual or couple must pay the whole 3.8 percent Medicare tax because there is no employer with whom to split the bill on “unearned income.”
Consider a married couple who earn $300,000, divided evenly between salaries and capital gains. Their total salary income of $150,000 would be subject to the combined 2.9 percent Medicare tax — split evenly between employee and employer. The first $100,000 in capital gains would not be subject to any Medicare tax, but the couple would have to pay a 3.8 percent Medicare tax on the last $50,000 in capital gains.
The two Medicare provisions “would improve both tax equity and economic efficiency,” said Chuck Marr of the liberal Center on Budget and Policy Priorities, who notes that the two taxes would affect “only the 2.6 percent of U.S. households with the highest incomes.” Mr. Marr reports that 91 percent of the increase in Medicare taxes would be paid by people earning more than $500,000.
Broadening the base of the Medicare tax for high-income households by extending it to capital gains, dividends and other unearned income would be “sound economically,” Mr. Marr said, because it would “modestly reduce incentives for economically unproductive tax sheltering.”
Today’s top income-tax rate for wage-and-salary income (35 percent) is more than twice as high as the top rate for capital gains and dividends (15 percent). This big difference encourages high-income earners to pursue unproductive tax sheltering by converting salary income to capital gains, Mr. Marr said.
Although only high-income households will pay the new Medicare levies, Republicans say, billions of dollars in other new taxes will be paid by individuals earning less than $200,000 per year and married couples earning less than $250,000. That would violate a 2008 campaign pledge by President Obama, Republicans say.
Portions of a multitude of new taxes totaling nearly $250 billion over 10 years would be paid, either directly or indirectly, by workers with incomes below those levels, Republicans on the House Ways and Means Committee said.
For example, both the law signed by Mr. Obama and the reconciliation bill raise money by taxing generous health-insurance policies, though the numbers differ.
But even the proposal sitting before the Senate, which taxes these “Cadillac plans” less than the bill signed into law, expects to raise $32 billion during the 2018-19 period. The “fix” heavily penalizes health-insurance plans costing more than $10,200 for individuals and $27,500 for families — imposing a 40 percent excise tax on the value above those amounts.
Many of these “Cadillac plans” are held by union workers in the private sector and by state and local government workers. Most families of both groups earn well below $250,000.
While the excise tax will be directly paid by the insurance company, economists of all persuasions expect the costs to be passed along to policyholders.
Middle- and working-class Americans, Republicans say, also can expect to pay a big portion of the numerous fees that the health care bill will impose on the pharmaceutical industry ($27 billion from 2011 through 2019), on medical-device manufacturers ($20 billion from 2013 through 2019) and on health insurance providers ($60.1 billion from 2014 through 2019), and on indoor tanning services (a 10 percent excise tax).
The new law also limits deductions for medical care, requiring people, including middle-income households and seniors, to have spent more of their own money on health care expenses before they become tax-deductible. Currently, expenses above 7.5 percent of adjusted gross income can be deducted for tax purposes; the bill Mr. Obama signed raises that threshold to 10 percent of income.
The legislation imposes mandates on employers with more than 50 workers to provide health insurance to their workers and on individuals and families to carry health insurance. The bill would impose penalties on those employers ($52 billion from 2014 through 2019) and households ($17 billion from 2014 through 2019) who do not comply with the mandates.
In part because these penalties would be administered and enforced by the Internal Revenue Service, Republicans consider them taxes and violations of Mr. Obama’s campaign pledge.
The White House declined to respond to a request for comment on the charge that the president broke his promise not to raise taxes on middle-income households.