ObamaCare’s Fiscal Cliff

Did you notice that in the standoff over the fiscal cliff, all the discussion was about the Bush tax cuts? Which ones would be made permanent? And for whom? There was no discussion about the ObamaCare tax increases. I think that was a huge tactical mistake on the part of the Republicans.

Over and over again, President Obama claimed he was trying to protect the middle class from higher taxes. It was a claim that went unchallenged ― by the Republicans and by the mainstream media.

Yet five of the tax increases Americans are facing this month are new taxes created under the Affordable Care Act (ObamaCare). Three of the five will hit people who are solidly middle class.

Next year, things will get worse. The new tax on health insurance is about as regressive as a tax can be. It will total $100 billion over the next 10 years and very little of that amount will be paid by anyone who can be called “rich.”

  • The health insurance tax will fall on private sector Medicaid plans, which have about 70% of all Medicaid enrollees.
  • The tax will fall on Medicare Advantage plans whose enrollees have below average incomes and are disproportionately minority.
  •  The tax will hit every small business and every individual who buys insurance in the commercial market place.
  •  The tax will not fall on self-insured plans whose enrollees include the highest paid workers and the highest paid CEOs.

Everybody knows the fight was fixed
The poor stay poor, the rich get rich

  

 

The ObamaCare taxes that kick in this month will hit everything from dividends and capital gains to day care and services for special needs children. They will increase the tax bill for those who have extraordinary medical expenses ― at the very time when they can least afford to pay higher taxes. They will hike the tax burden for the chronically ill who have several thousand dollars of out-of-pocket prescription drug expenses every year. The taxes will fall on medical devices ranging from pacemakers and artificial hips to bedpans and stents.

All told, these new taxes will create a burden in excess of $250 billion over the next 10 years.

The case for delaying these taxes is strong. Clearly they will depress economic activity and slow the recovery. But there is also another reason: we don’t need the money. The new ObamaCare taxes are supposed to provide the revenue to furnish subsidized health insurance to millions of people who will begin buying it in health insurance exchanges in January 2014. But the subsidies won’t be needed if the insurance is not available, and it won’t be if the exchanges are not up and running at that time.

Here is my prediction: aside from two states that already have exchanges (Massachusetts and Utah), only one other state (Maryland) will make the deadline. Maybe Colorado and California will make it if they are lucky. But that’s it. No other state is going to have operational exchanges on time.

In fact, half the states aren’t even planning to set up exchanges. That responsibility will then fall to the federal government. But no money has been budgeted to fund such a large federal operation. The full implementation of ObamaCare could actually take years. In the meantime, let taxpayers keep more of their income to meet their own needs.

Here is a brief summary of the taxes that kick in this month, courtesy of Americans for Tax Reform.

Medical Device Tax: $20 Billion. This 2.3% tax on gross sales could amount to a very large percent of after tax profit ― thus encouraging an industry that is providing very good domestic jobs to relocate overseas. Meanwhile, the burden of the tax will be reflected in higher prices for anyone who needs an artificial knee or hip or a pacemaker.

Flexible Spending Account (FSA) Limits: $13 Billion. Roughly 35 million Americans use FSA accounts to pay medical expenses not paid by the employer’s health insurance with pre-tax dollars. These accounts are especially important to chronic patients with substantial out-of-pocket drug expenses. FSAs can also be used to pay for day care and services for special needs children. Currently, there is no legal limit on how much an employee can deposit in the account, but many employers cap the annual contribution at $5,000. After January 1, however, contributions will be limited to $2,500 ― effectively cutting the tax advantage in half.

Surtax on Investment Income: $123 Billion. Democrats often say they merely want to return to Clinton era tax rates for the highest-income taxpayers. They conveniently omit the fact that ObamaCare adds 3.8 percentage points to those rates ― bringing the highest marginal tax rate up to 43.4% for individuals making more than $200,000 and couples earning above $250,000. Add on a 13% state tax in California and some taxpayers will be paying more than half of all they earn to the government. The new tax hits dividends, capital gains and other investment income.

Limits on Itemized Medical Expense Deductions: $15.2 Billion. Currently, people can deduct medical expenses in excess of 7.5% of income if they itemize. Next year, that threshold will rise to 10%. This means a higher tax burden for those who have the misfortune to have large medical bills. It is literally a tax on the sick.

Higher Payroll Tax: $86.8 Billion. The Medicare payroll tax is currently 2.9% on all wages and self-employment profits. Under this tax hike, wages and profits exceeding $200,000 ($250,000 for a couple) will face a 3.8% rate instead. This is a direct tax hike for small business owners, who are liable for self-employment taxes in most cases.

Comments (24)

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  1. Vicki says:

    Song is very cynical.

  2. Andrew O says:

    I don’t understand why the entire fiscal debate would not even touch these tax implications. Why did the Republicans not speak out if these tax implications were there? It just doesn’t make sense that something this big wouldn’t be more heavely debated so that the public is rightfully informed.

  3. Buster says:

    The Fiscal Cliff negotiations are a joke. Congress isn’t willing to take away perks they’ve already promised in return for another 2, 4 or 6 years in office.

  4. Studebaker says:

    It’s hard to fathom that Congress thought U.S. taxpayers could afford yet another entitlement. It also thought doctors and hospitals could have their fees cut and would treat all the new Medicaid enrollees and continue to treat Medicare beneficiaries. The naivety of these people is immense.

  5. Tom H. says:

    I don’t understand why the Republicans didn’t make an issue of this.

  6. Ramesh Chandra says:

    Congress and Republicans have no clue how to fight this war, just like Romney didn’t have. When you cherry pick each cherry , you end with handful of nothing. Total focus should have been Budget that follows proper accounting standards(and separate trust funds from general funds), then reduction of deficit(at macro-level), balancing of budget, then debt reduction. First goals need to be negotiated. Zero deficit in 4 years or 10 years. Then focus on revenue from Government services, and accountable economic developments(jobs due to new exploration, closing the skill gap quickly etc.). Instead Republicans are throwing their weapons away and walking into the slaughter house to be cut into pieces.

  7. civisisus says:

    Ramesh has it, basically. The occasionally clever “Dr.” Goodman is as delusional as any gun-fetishist tweeper about anything resembling “conservative principles”.

    You’ve had your opportunity, Dr. Goodman, you and your ideologically straitjacketed tribe; you screwed it up.

    Move on.

  8. Ramesh Chandra says:

    My comments are not meant to be any derision towards John. He is one of the few people I respect and one with clear analysis. The problem people had with Romney was not connecting in a way different from people thought what the disconnect is. First, He did not show long term commitement to the cause. His disappearance from the scene and Tagg’s comment that Mitt really didn’t want to be President are clear example. May be that is why he/his team did not listen to people’s comments. If you don’t want to be get in the mud pit and stay to fight, why did you get into it. No body else is there is a cop-out. I have the same qs. for Republicans, conservatives and anybody who can think. Do you really care? If you do , do you realize that this is political war? Do you know what it takes? Do you have the energy? Show me one Republican leader(?), who can lead?

  9. John Sweeney says:

    Very depressing. I mean, it’s depressing how incompetent the Republican congressional leaders are. I agree with Mr. Chandra: if you’re not in politics to take it to the opposition, why are you in it at all?

  10. Ramesh Chandra says:

    It is not just the congressional leaders. It is the whole party It is like there is a curse of impotency.
    Got to go. Will continue when I get back.

  11. John Sweeney says:

    Right you are. The Republicans here in the state of Washington are particularly inept. They even work against their own candidates sometimes!

  12. Neil Caffrey says:

    “It will total $100 billion over the next 10 years and very little of that amount will be paid by anyone who can be called ‘rich.'”

    – Funny how this always seems to be the case when liberals reform anything that has to do with taxes.

  13. Ramesh Chandra says:

    am back. we sensed the beginning of Republican loss in the second debate. When the moderator started acting like the debater, R did not have to ask her whether he is debating O or the moderator. He did not have the guts to ask what did O knew as of that moment. Scott R would have done a better job. I guess that is the diff. between practicing lawyer and investment lawyer. It is a shame that Ryan and Walker could not deliver Wisconsin, Marco and Jeb could not deliver Florida, Cantor and McDonald could not deliver VA on and on. It is was and it is a totally disjointed party. Right now there is not a single leader in the Republican party who can be the General. Does any of these people have any idea how to translate our resources into creating employment,Revenue and increasing the GDP w/o increasing expenses. Let send all these people to Managerial Accounting 101, Profiles in political courage 101.

  14. Ramesh Chandra says:

    Sorry, i meant to say R did not have the courage to question to moderator.

  15. Peter Ferrara says:

    Excellent point John. During the fiscal cliff battle, the Republicans should have called for repeal of the Obamacare tax increases on the middle class, if Obama was so concerned about not increasing taxes on the middle class. I would have included in that the individual mandate itself. Why didn’t they do that? This is why we need more voices from outside the Beltway in Washington. The longer you stay in Washington, the more you see the truth of the truism that the two parties in Washington are the stupid party and the evil party. It shouldn’t be hard to identify which is which.

  16. Patty says:

    Agree with John Goodman, that on 1/1/2014 Obamacare will simply blow up on the launchpad.

  17. Bill Stuart says:

    Excellent piece as usual, John. Few appreciate that 01/01/2014 is right around the corner, and few states are prepared for it. Meantime, as someone inside a health insurer, I can tell you that insurers are collectively spending billions of dollars complying with the 01/01/14 mandates. In many cases, these mandates won’t result in better overall health care, better outcomes, less consumer confusion or more affordable insurance. Sadly, the financial and human resource drain is merely diverting effort from programs and initiatives that might make a real difference in cost and quality of life.

    As a side note, the change in FSA rules doesn’t impact day care. The maximum, set in the original law in the mid-1980s, remains at an inflation-unadjusted figure of $5,000 per calendar year. The rest of your analysis of the changes in FSA rules – and their impact on individuals with chronic conditions or acute episodes – remains valid.

  18. Ramesh Chandra says:

    Yes. The biggest drain is the diversion of human resources away from programs which really matter.

  19. bart says:

    Agree with Ramesh. Regarding the 2nd debate, is it just me, or does anyone else remember Crowley preventing Romney from even answering one of the questions (I think it was the softball question to Obama about free contraception). After Obama gave his spiel, I remember Romney beginning to speak & then Crowley cuts him off, saying she wants to “move on to the next question.” Romney should have put his foot down just then.

  20. Ramesh Chandra says:

    It wasn’t a qs. It was a statement that Obama did not acknowledge that Benghazi was a pre-planned terrorist act. Crowley flashed a piece of paper saying Governor u r wrong, he did say on the WH front lawn it is a terrorist act. She corrected herself late, after she did the damage. The only time R was aggressive was when he said he will fire Gingerich for the moon project. Throughout he let the opposite side and amateurs define him unjustly. Actually moon colony project is not a bad idea. Imagine the combination of gas drilling, technology to create brand new cities where the drilling might have effected the landscape, moon colonization, asteroid mining and more, where this country really go to. Is there any Leader left in this country with combination of imagination and implementation. Don;t see one even with my maginfying glasses. Sad to Say…

  21. Steven Bassett says:

    The insurer tax in 2014 is $8Billion, don’t forget $12Billion in reinsurance fees that hits insured and self funded plans in 2014.

  22. Ramesh Chandra says:

    Will the re-insurer fee apply to individual plans where premiums are paid by employers? I don’t see that. So individual plans are exempted from this fee?

  23. bart says:

    Ramesh, the Crowley/Benghazi incident came a few minutes after the one to which I was referring.

    I’m pretty sure it was the question on mandated coverage for contraception, perhaps 75-80 percent of the way into the debate, and Romney was prevented from saying more than a few words. I should watch it again just to see if I’m remembering correctly, but it was too painful the first time.

  24. Ramesh Chandra says:

    Bart,
    You might be right. But I think his best chance was to jump all over on Benghazi issue and O was running to his chair like a scared mouse. I remembered a time when Scott Romney(Mitt’s brother and my attorney), trounced my opponent in a negotiation. Anyway the important thing is the difference between keeping silent and making a quick attack and coming back to your focus and not letting the opponent distract you or your audience that gives you the edge. Republicans need to make budget the only item until it is resolved.