Taxes, Health Reform, and the Supreme Court

By :: March 29th, 2012

There is more to the Affordable Care Act than the individual mandate. There are also, for example, taxes. And since this is TaxVox, I thought it would be useful to think about some of those revenue provisions in the wake of the Supreme Court’s three-day hearing on the fate of the ACA.

The law includes both tax increases and tax cuts. Even if the controversial individual mandate is struck down, most of those tax changes would survive—unless, of course, the High Court grants the law’s critics their fondest wish and kills the entire act.

The only tax—if it is a tax at all—that relates directly to the mandate is the penalty people would owe for failing to buy insurance. Whatever High Court does to the mandate, it will be interesting to learn whether the justices decide this levy is in fact a tax or a penalty. The Obama Administration is firmly on both sides of this question, as are the opponents of the law.

The ACA also includes some important tax cuts—generous credits aimed at subsidizing small businesses that buy insurance for their employees. You might not know these tax cuts are in the law given the $1 million-plus the National Federation of Independent Business reportedly paid for legal and other fees to challenge the ACA, but they are there nonetheless.

Query:  Does it make sense to maintain the subsidy if the Court rejects other key elements of insurance reform?  I’m sure the NFIB will say so.

Finally, the law includes several tax increases, including a new excise tax on high-value employer sponsored health plans (starting in 2018) and a provision that makes it tougher for people to itemize deductions for their medical costs.

Two other tax increases are worth noting. They are often labeled hikes in the Medicare payroll tax, although the biggest has nothing to do with either Medicare or payrolls.

The first is a 0.9 percent increase in the Medicare wage tax for high-income workers. This would help finance the senior health system. The second is a new 3.8 percent tax that high-income households will have to pay on income from investments and other non-wage sources. Sometimes called a Medicare surtax, its real purpose is to bankroll some of the costs of the ACA.

In a new study, the Tax Policy Center finds that the new taxes would indeed hit very high-income households--some quite hard.  Combined, in 2013 the two new levies would raise taxes for households making between $500,000 and $1 million by an average of about $4,600 and boost taxes for those making at least $1 million by more than $41,000. These estimates are relative to current law, where the 2001/2003 tax cuts expire at the end of 2012.

These taxes will hit incomes in excess of $250,000 for couples ($125,000 for singles). But because that threshold is not indexed for inflation, the number of households facing these taxes will nearly double over the next decade, from 2.4 percent of all taxpayers in 2013 to 4.6 percent in 2022.

Don’t forget about these tax provisions. Even if the Supreme Court leaves all them untouched, I suspect we have not heard the last of them.





  1. Taxes, Health Reform, and the Supreme Court | Tax Information  ::  10:45 am on March 29th, 2012:

    […] post: Taxes, Health Reform, and the Supreme Court Posted in News Tags: affordable, court, grants-the-law, individual income taxes, individual […]

  2. Ralph H  ::  1:52 pm on March 29th, 2012:

    The rebate for small businesses is rather frustrating to apply for, and is less useful than advertised. There are complicated deduction factors as your number of employees approach 25, your average pay approaches $50,000 and if your health plan exceeds the average plan for your state. For my company we got little over $1000, mainly because we (apparantly) pay too well and offer too good ofa a plan. While not looking a gift horse in the mouth, we would have done MUCH better if we got the same rates as large organizations. My sense is it provides better publicity than actual benefit.

    In terms of the taxes on unerned income, I dislike paying for it, but realistically its the least we can do since part of the medicare/medicaid benefit is subsidized healthcare for the poor and thus not an insurance.

  3. Michael Bindner  ::  5:35 pm on March 29th, 2012:

    The last minute of Tuesday’s C-SPAN playback of the Solicitor General’s closing calls upon the Court to uphold the mandate as a tax under U.S. v. N.Y. Go to 01:59:20 for that last historic minute. The high wage payroll and non-wage income surtaxes are likely the reason that many people funded the campaign to repeal the law – not because of some constitutional objection to the mandate. I don’t assume the mandate will be repealed (on tax grounds) – but if it was, it would be poetic to leave the surtax in place. There was a hearing on the mandates before the House Ways and Means Health Submcommittee. I am copying my comments for the record below.

  4. Michael Bindner  ::  5:38 pm on March 29th, 2012:

    Chairman Herger and Ranking Member Stark, thank you for the opportunity to submit my comments on this topic.

    The hearing advisory states that most people oppose the current law. While this is technically true, it is also true that a little less than half the opposition comes from progressives who wanted a stronger law in terms of government involvement. Additionally, those who oppose the law, in many cases, do not do so on its merits, which were mostly lifted from conservative think tanks and the Massachusetts experience, but because they see the law as a stepping stone to the kind of reform favored by the Democrats who oppose the law. Later in our comments, we will address how mandates under the law are inadequate to offset community rating and guaranteed acceptance procedures and the likely consequences of that. First, however, we will address some of the issues before the court regarding mandates.

    Before even considering the constitutionality of mandates under the Commerce Clause, the Supreme Court will examine if the mandate penalty is actually a tax and if it is a tax, whether consideration of this issue is even ripe. The Center for Fiscal Equity has always believed that this penalty is, in fact, a tax, and that the Court will likely quickly rule that it is and that further consideration of its constitutionality must wait until the tax is collected, leaving all other issues in abeyance until that occurs – although, frankly, it would be an act of judicial malpractice to let clients go forward on a what would be a Quixotic quest against the taxing power to bring this up again.

    That is the first hurdle and it is the out that the Court is looking for to avoid the complicated constitutional question. The second is that the dollars funding the public relations campaign against the law are not brought out because the don…ors object to the mandate, but because the non-wage income payroll taxes which will take effect soon are costing rich people money – especially since there are no offsets to paying them or passing the cost to customers – essentially turning these taxes into a VAT. Indeed, a VAT would be less objectionable than keeping these taxes in place, because the burden is more broadly shared, more visible and refundable at the border.

    As an aside, the objection to using the threat of loss of federal funding to enforce Medicaid reforms is a long objection of so called “Federalists” (who are in truth, states rights supporters, which is something different) has never gained much traction, from using highway funding to enforce the 55 mile per hour speed limit to using the same funding to force a 21 year old drinking age. It is an unsophisticated objection. I made the same argument in Iowa Model legislature when in High School – contending that the clause prohibiting differing regulations of commerce or revenue applied. Any first year law student or historian will point out that this clause applies to international trade, not the regulation of interstate commerce or the use of intergovernmental funds. We suspect that the Court has likely allowed it to be argued to kill this argument once and for all. To expect either a radical rethinking of the Commerce Clause or intergovernmental funding requirements will occur at this time is the legal equivalent of believing in unicorns.

    The opposition to reform is well funded and sophisticated. We believe it has nothing to do with mandates, the Commerce Clause or Medicaid funding. The real reason conservative major donors don’t like the law is the funding mechanism for much of reform. Wealthy donors are writing checks because of provisions creating additional taxes on un-earned income that fix Medicare Part A funding and fund other health care reform, essentially turning the Hospital Insurance Tax into a Value Added Tax with an exemption on profits paid to the 98%. Fighting for repeal on this basis, however, would only be politically unpopular. Only judicial repeal would of the whole law stops this tax hike, although there is no justification for not severing this portion from the law, even if the mandate falls.

    Note that whenever this tax applies to those whose holding operate in less than a perfectly competitive market, in other words to most commerce in 21st century America, the costs will likely be passed to the consumer and it would be more honest to simply enact a Value Added Tax or VAT-like Net Business Receipts Tax (which is proposed below).

    We will now return to the question of the adequacy of mandates. The key issue for the future of health care consolidation is the impact of pre-existing condition reforms on the market for health insurance. Mandates under the Affordable Care Act (ACA) may be inadequate to keep people from dropping insurance – and will certainly not work if the mandate is rejected altogether for constitutional reasons.

    If people start dropping insurance until they get sick – which is rational given the weakness of mandates – then private health insurance will require a bailout into an effective single payer system. The only way to stop this from happening is to enact a subsidized public option for those with pre-existing conditions while repealing mandates and pre-existing condition reforms.

    In the event that Congress does nothing and private sector health insurance is lost, the prospects for premium support to replace the current Medicare program is lost as well. Premium support, as proposed by Chairman Ryan, also will not work if the ACA is repealed, since without the ACA, pre-existing condition protections and insurance exchanges eliminate the guarantee to seniors necessary for reform to succeed. Meanwhile, under a public option without pre-existing condition reforms, because seniors would be in the group of those who could not normally get insurance in the private market, the premium support solution would ultimately do nothing to fix Medicare’s funding problem.

    Resorting to single-payer catastrophic insurance with health savings accounts (another Republican proposal) would not work as advertised, as health care is not a normal good. People will obtain health care upon doctor recommendations, regardless of their ability to pay. Providers will then shoulder the burden of waiting for health savings account balances to accumulate – further encouraging provider consolidation. Existing trends toward provider consolidation will exacerbate these problems, because patients will lack options once they are in a network, giving funders little option other than paying up as demanded.

    Shifting to more public funding of health care in response to future events is neither good nor bad. Rather, the success of such funding depends upon its adequacy and its impact on the quality of care – with inadequate funding and quality being related. For example, Medicare provider cuts under current law have been suspended for over a decade, the consequence of which is adequate care. By way of comparison, Medicaid provider cuts have been strictly enforced, which has caused most providers to no longer see Medicaid patients, driving them to hospital emergency rooms and free clinics with long waiting periods to get care.

    Ultimately, fixing health care reform will require more funding, probably some kind of employer payroll or net business receipts tax – which would also fund the shortfall in Medicare and Medicaid (and take over most of their public revenue funding). We will now move to an analysis of funding options and their impact on patient care and cost control.

    The committee well understands the ins and outs of increasing the payroll tax, so I will confine my remarks to a fuller explanation of Net Business Receipts Taxes (NBRT). Its base is similar to a Value Added Tax (VAT), but not identical.

    Unlike a VAT, an NBRT would not be visible on receipts and should not be zero rated at the border – nor should it be applied to imports. While both collect from consumers, the unit of analysis for the NBRT should be the business rather than the transaction. As such, its application should be universal – covering both public companies who currently file business income taxes and private companies who currently file their business expenses on individual returns.

    The key difference between the two taxes is that the NBRT should be the vehicle for distributing tax benefits for families, particularly the Child Tax Credit, the Dependent Care Credit and the Health Insurance Exclusion, as well as any recently enacted credits or subsidies under the ACA. In the event the ACA is reformed, any additional subsidies or taxes should be taken against this tax (to pay for a public option or provide for catastrophic care and Health Savings Accounts and/or Flexible Spending Accounts).

    If cost savings under an NBRT, allow companies to offer services privately to both employees and retirees in exchange for a substantial tax benefit. Employers who fund catastrophic care would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid. Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but no so much that the free market is destroyed. The ability to exercise market power, with a requirement that services provided in lieu of public services be superior, will improve the quality of patient care. To the extent that

    This proposal is probably the most promising way to decrease health care costs from their current upward spiral – as employers who would be financially responsible for this care through taxes would have a real incentive to limit spending in a way that individual taxpayers simply do not have the means or incentive to exercise. While not all employers would participate, those who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be established so that participating employers might trade credits for the funding of former employees who retired elsewhere, so that no one must pay unduly for the medical costs of workers who spent the majority of their careers in the service of other employers.

    Employer provided health care will also reverse the trend toward market consolidation among providers. The extent to which firms hire doctors as staff and seek provider relationships with providers of hospital and specialty care is the extent to which the forces of consolidation are overcome by buyers with enough market power to insist on alternatives, with better care among the criteria for provider selection.

    The NBRT would replace disability insurance, hospital insurance, the corporate income tax, business income taxation through the personal income tax and the mid range of personal income tax collection, effectively lowering personal income taxes by 25% in most brackets. Note that collection of this tax would lead to a reduction of gross wages, but not necessarily net wages – although larger families would receive a large wage bump, while wealthier families and childless families would likely receive a somewhat lower net wage due to loss of some tax subsidies and because reductions in income to make up for an increased tax benefit for families will likely be skewed to higher incomes. For this reason, a higher minimum wage is necessary so that lower wage workers are compensated with more than just their child tax benefits.

    Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.

  5. Tax Roundup, 3/30/2012 « Roth & Company, P.C  ::  9:01 am on March 30th, 2012:

    […] There’s a lot more tax to Obamacare than the penalty for not buying insurance that may bring the whole thing down.  Howard Gleckman at TaxVox reminds us of the other taxes, like the 3.8% tax on “passive” …. […]

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