One of the key issues the White House, House, and Senate will be negotiating behind closed doors, is how to pay for President Obama’s $2.5 trillion plan. Reconciling the differences between these two bills will remain a difficult task for legislators particularly as they rely on a different mix of revenue-generators. The following two lists include key revenue-generating mechanisms in both the House and Senate bills as reported by Tax Notes.
House-passed Affordable Health Care for America Act (H.R. 3962):
- $460.5 billion over 10 years from a 5.4 percent Surtax on individuals making more than $500,000 and families earning more than $1 million (begins 2011)
- $135 billion as part of an 8 percent tax of a firm’s payroll ($750,000 or more) and a lower rate if firm payroll is between $500,000 $749,999 (begins 2013)
- $33 billion as part of a 2.5 tax on modified adjusted gross income (AGI) for those individuals that do fail to secure “acceptable” health coverage (begins 2014)
- $20 billion from a 2.5 percent excise tax on medical devices (begins 2013)
- $17.1 billion in corporate information reporting requirements (applies to payments made after December 31, 2011)
- $13.3 billion from a cap on Flexible Spending Accounts (FSAs) at $2,500 and indexed forward to the CPI-U (begins 2011; currently there is no cap)
- $7.5 billion for the limitation of tax treaty benefits related to U.S. withholding tax imposed on deductible related-party payments
- $6 billion from a “worldwide interest allocation” repeal (begins 2011)
- $5.7 billion as a result of codifying the economic substance doctrine and imposing penalties on underpayments
- $5 billion for reforming the definition of medical expenses under FSAs, health savings accounts, Archer Medical Savings Accounts, and health reimbursement arrangements, including the exemption of over-the-counter medications prescribed by a doctor (begins 2011)
- $2.2 billion as part of an end to the Medicare Part D subsidy (begins 2013)
Senate-passed Patient Protection and Affordable Health Care Act (H.R. 3590):
- $148.9 billion as part of a 40 percent nondeductible excise tax on insurance plans of more than $8,500 for individuals and $23,000 for families and indexed to the CPI-U plus 1 percentage point (begins 2013)
- $101 billion in yearly nondeductible fees on manufacturers and importers of pharmaceuticals (begins 2010), on manufacturers and importers of medical devices (begins 2011), and health insurance providers (begins 2011)
- $86.8 billion as part of Medicare Payroll tax increase from 1.45 to 2.35 percent for individuals with wages of more than $200,000 and $250,000 for joint filers (begins 2013)
- $28 billion from employer penalties on full-time workers that receive subsidies to purchase coverage through new insurance exchanges
- $17.1 billion in corporate information reporting requirements (applies to payments made after December 31, 2011)
- $15.2 billion from an increase in the floor for deductible medical expenses from 7.5 percent of AGI to 10 percent of AGI and a “carve-out” for those older than 65
- $15 billion in tax penalties on individuals who fail to secure “qualified” health coverage (begins 2014)
- $13.3 billion from a cap on Flexible Spending Accounts (FSAs) at $2,500 and indexed forward to the CPI-U (begins 2011; currently there is no cap)
- $5.4 billion as part of an end to the Medicare Part D subsidy (begins 2011)
- $5 billion for reforming the definition of medical expenses under FSAs, health savings accounts, Archer Medical Savings Accounts, and health reimbursement arrangements, including the exemption of over-the-counter medications prescribed by a doctor (begins 2011)
The House- and Senate-passed bills clearly deviate from one another on the types of revenue-generating mechanisms included to maintain at least a “deficit-neutral” CBO score. The House bill relies punitively on both a surtax on high-income individuals as well as employers (even reaching small businesses). Alternatively, the Senate bill predominantly relies largely on a Medicare payroll tax on high-income individuals, fees on pharmaceutical medical device and health insurance providers, as well as an excise tax on high-value health insurance plans.
It is unclear, and will likely remain unclear until a final bill is passed, regarding the exact mix of revenue-generating mechanisms included to finance a final health care reform bill. What is clear, however, is that American individuals and businesses should begin bracing now for higher taxes—they are coming in one form or another!
The Senate Health Bill: How the Mandates Kill Jobs and Punish Poor Workers
Author: Robert BookLast night, Senate Majority Leader Harry Reid released his giant version of the Senate health care bill, H.R. 3590.
A first look at the bill – which is 2,074 pages long – shows yet another attempt to use taxes to punish uninsured Americans and punish companies that hire workers from low-income families, especially single parents. If you wanted to punish the poor and kill the job prospects of people who need jobs the most, this would be an effective way to do it.
The Individual Mandate. First, there is the “individual responsibility” provision in Section 1501 (pages 320-340). This would require anyone who fails to obtain a qualifying health plan – with a benefit package to be defined later by bureaucrats – to pay an annual tax penalty of $750 per adult family member and $375 per child, with a maximum penalty of $2,250 per family. These penalties will be phased in from 2014 to 2016 and then indexed for inflation, which means they are likely to increase nearly every year. These taxes are fixed amounts based on family size, not income.
The rich will not pay more, and the middle class will not pay less (although the poor may qualify for exemptions). This is even worse than the House bill, which imposed a tax equal to 2.5 percent of modified adjusted gross income above the minimum income necessary to file a tax return. A family of at least two adults and two children is actually worse off under the Senate bill if they make less than $99,350 a year, and worse off under the House bill if they make more. The only nod to affordability is a “hardship exemption” if the lowest available premium for a bare-bones plan is more than 8 percent of your income. But that saves you money only if your income is less than $28,125 a year.
There are, however, a few exemptions. You won’t have to pay the tax if you are a member of a qualified religion, as described in Section 1402(g)(1) of the Internal Revenue Code, or if you are a member of a “Health Sharing Ministry.” You also won’t have to pay the tax if you are an illegal alien (assuming you can prove your status) or if you are incarcerated, or if you reside outside the United States for most of the year.
The Employer Mandate. Then there is the “employer responsibility” provision (Section 1511-1513, pages 346-357). Companies with more than 50 employees are required to offer qualified health plans – with a benefit package to be defined later by bureaucrats – to their full-time employees or pay a tax of $750 per full-time employee. That’s a lot cheaper than providing health insurance, and the $750 is just a tax – it doesn’t count towards the employee’s premium.
However, an employer who does offer qualifying insurance isn’t entirely off the hook. Suppose an employer offers insurance, but has an employee from a low-income family who qualifies for a premium subsidy in the “health insurance exchange” and decides to accept it. In that case, the employer is stuck with a tax penalty of $3,000 for that employee, and every other employee who qualifies and makes that same choice – unless it’s more than a quarter of the employees, in which case the tax is capped at $750 times the total number of full-time employees. (Workers will be permitted to opt out of their employer’s plan only if they qualify for a subsidy, have insurance through another family member, or if the employer covers less than 60 percent of their premium.)
Hurting the Poor. In other words, if a company has a lot of low-income workers, they can save money by dropping their health plan and just paying the $750 per-employee tax. (And they can make as many employees as possible part-time.) However, if they have mostly middle-income workers, they face a heavy penalty — $3,000 – every time they hire a worker from a low-income family. This goes by the employee’s family income, not the income the employee is paid by any particular company. So a company could save $3,000 by hiring, say, someone with a working spouse or a teenager with working parents, rather than a single mother with three children.
Even worse, if at least a quarter of the employees qualify for a premium subsidy based on their income and family size, the company is going to end up paying the same $750 per-employee tax – whether they offer insurance or not! So companies with a lot of low-income employees will essentially be encouraged to drop their health plans entire, dumping the remaining higher-income employees into the federal exchange at their own expense.
Seriously Bad Policy. In other words, employers will have a strong tax incentive to lay off the workers who need the jobs most – people without other sources of income.
How will employers know who those workers are? The federal officials will tell them when they send the tax bill (Section 1412).
Employer will be required (Section 1513) to inform the IRS of precisely who their employees are and during which months they carried insurance, to make sure the IRS knows who has to pay the “individual responsibility” penalty.