Who really pays for health care reform?

By Kevin Wedmore

A2Z Annuity Marketing

The health care reform bill signed into law by President Obama contains a variety of new taxes designed to help pay for the expansion of health insurance to an estimated 30 million more Americans. As with all federal mandates, someone has to pay. And while we hear that it is the "rich" who will be funding this new coverage, you might want to consider this; where do taxes get paid?

First, let's look at some of the new taxes that will go into effect in order to bring this program to bear, starting with some of those that will take effect the earliest:
  • A new 10 percent excise tax on indoor tanning services that takes effect for services provided after June 30, 2010.

  • Giving small firms tax credits as incentives to provide coverage, starting this year. Employers with 10 or fewer workers and average annual wages of less than $25,000 can receive a credit of up to 35 percent of their health premium costs each year through 2013. The credit is phased out for firms larger than that, and disappears completely if a company has more than 25 employees or average annual wages of $50,000 or more. Beginning in 2014, small firms that sign up with one of the health exchanges to be created can receive a credit of up to 50 percent of their costs.

  • A requirement that businesses include the value of the health care benefits they provide to employees on W-2s, beginning with W-2s for 2011.

  • Elimination, after this year, of a deduction employers now take for providing Medicare Part D prescription drug coverage to their retirees to the extent that the federal government subsidizes the coverage. This will not take effect until 2013.

  • Doubling the penalty for nonqualified distributions from health savings accounts to 20 percent, beginning in 2011.

  • A limit on the amount that employees can contribute to health care flexible spending accounts to $2,500 a year. Under the House package of changes, the cap won't take effect until 2013.

  • A ban on using funds from flexible spending accounts, health reimbursement arrangements, or health savings accounts for the cost of over-the-counter medications, starting in 2011.

  • Imposing a 0.9 percent Medicare surtax on wages of single taxpayers earning more than $200,000 a year and couples earning over $250,000, starting in 2013. In addition, the House's package of modifications would levy a special 3.8 percent Medicare tax on the unearned income of those taxpayers. The House defines unearned income as interest, dividends, capital gains, annuities, royalties and rents. Tax-exempt interest would not be included, nor would income from retirement accounts.

  • A hike in the 7.5 percent floor on itemized deductions for medical expenses to 10 percent, beginning in 2013. But taxpayers aged 65 and over are exempt from the cutback through 2016.

  • A new 40 percent excise tax, beginning in 2013, on high-cost health plans, defined as those providing coverage in excess of $8,500 for individuals and $23,000 for families. The House's package of modifications includes higher threshold amounts and an initial effective date of 2018.

  • A new tax on individuals who don't obtain adequate health coverage by 2014. The tax is be phased in over three years, starting at the greater of $95, or 0.5 percent of income in 2014, and rising to the greater of $750, or 2 percent of income in 2016. The House-passed companion measure would modify this provision so that a person without coverage in 2014 would pay the greater of $95, or 1 percent of income, and in 2016, would pay the greater of $695, or 2.5 percent of income.

  • Providing a refundable tax credit once the individual mandate takes effect in 2014 to help low-income folks purchase coverage. To be eligible, a person's household income must be between 100 percent and 400 percent of the federal poverty level, generally around $11,000 to $44,000 for singles and $22,000 to $88,000 for families.

  • A nondeductible fee charged to businesses with 50 or more employees if the firms fail to offer adequate coverage. The fee will total $750 multiplied by the number of workers in the firm, and is slated to go into effect in 2014. The House's package of modifications would increase that fee to $2,000 times the number of employees, though it would not count the first 30 workers in that calculation
Wow, that's a lot to digest. At first glance, many of the new taxes appear to affect only those individuals making over $200,000 per year or couples making in excess of $250,000 per year. The surtax on earnings at those levels contains an increase in Medicare contributions and also a 3.8 percent tax on investments -- including annuities. Isn't that part of our business?

Let's take a closer look at who is really paying the majority of these new taxes.

My pre-vacation tanning sessions will get a boost in cost this summer, thanks to a 10 percent levy specifically aimed at tanning salons. How many high school and college kids do you think this tax will affect? (Or more realistically, how many parents of these kids will it affect?) I know it's a "luxury," and I suppose you could say it adds to health care costs, but for the vast majority who only visit prior to spring break or an expected vacation in a sunny destination, they do no harm. Yet those are the people who will subsidize the cost of this bill, to the tune of $20 billion.

Tax credits for small businesses may encourage some to offer coverage for now, but what happens when the credits expire? There is only three years of credit. If small businesses add health insurance coverage for their employees, aren't they going to pass along the cost to you and me? And if the credits expire in three years, will we see more layoffs as small businesses determine they can't afford either the employee or the full cost of care?

Know any retirees? If companies can't take a deduction for providing Part D coverage as part of their retirement plans, will retirees see this benefit disappear? Who will pay the cost if it does?

Fortunately, most of us reading this aren't W-2 employees. But what about those who are? While the reporting function takes place starting next year, there appears to be no tax due at this time. When the employer's contribution toward your health care becomes taxable, it will not only increase what you pay in income taxes, but it could also put you into a higher tax bracket.

Health care savings accounts get a double whammy: doubling the penalty for non-qualified distributions to 20 percent and no longer allowing over-the-counter medically-related supplies to be purchased from the funds in the account. All of those who are using HSAs, flex spending accounts (and more and more employers have added these in the past several years,) or other reimbursement-type accounts will no longer be able to pay for supplies and OTC medications with pre-tax dollars. In addition, flexible spending account contributions will be capped at $2500. If your clients are contributing more now, the decrease in contributions means fewer pre-tax dollars that can be used for health care expenses or child care. The result? A tax increase.

The hike in the floor for itemized deductions will hit the elderly especially hard. Many of our seniors are paying for home health care, assisted living, or nursing home expenses that are deducted from their reportable income. Sure, a 2.5 percent increase in cost doesn't sound like much, but tell that to someone on a fixed income trying to make ends meet while paying catastrophic health care expenses.

As for the excise tax on high-cost health care plans, who among us believes that companies will not pass the cost along to us in the form of increased prices for their goods and services?

And the big one? Companies who do not comply with coverage mandates will pay fees that will be used, supposedly, to give tax breaks to those individuals who need to purchase private plans. Failure by these individuals to purchase minimum coverage would also result in a fine.

What does that mean to you and me in the form of higher taxes? Presumably, large companies will comply and therefore be forced to provide coverage. When they do, who does the government expect will pay these new premiums? The company? No, it will be you and me again, in the form of higher prices for their goods and services. And if they don't comply? Who will pay for the care for their employees while the company skirts on paying fees that are substantially lower than the premiums they have avoided?

No doubt by now you are getting weary of hearing about tax increases that will be levied in order to pay for health care reform. And I wish that was the end of the story. The truth is that the tax increases outlined above will only partially pay for the expected cost of this new law. (And when has the CBO accurately predicted the cost of new legislation?) Other new taxes in the legislation include a surcharge on prescriptions manufactured outside of this country, expected to bring in over $27 billion over 10 years. Do you think those prescriptions will cost more or less at the consumer level?

How about a 20 percent excise tax on the manufacture or importation of certain medical devices? Lower or higher health care costs for the consumer?

Or, how about the estimated $60 billion fees levied against health insurance providers? Will premiums go up or down as a result of these fees?

And finally, a health care tax I couldn't resist sharing with you. The new legislation contains a provision that will end a tax deduction for the manufacturers of paper products. The deduction is due to write-offs they have benefited from because they are able to manufacture alternative fuels as a by-product of the paper making process. Shutting down this deduction is figured into the health care legislation as a way to pay for this plan. Don't we all use paper products? Does this mean the price of my toilet paper will go up?

The answer to the question of "who really pays?" is obvious. We all do. Taxes for goods and services are never paid at the top level, they are only remitted there. They are paid at the bottom level -- the consumer. Yes, there are more hidden taxes and fees in this bill, and yes, you and I will pay them. Take the time to read and understand this legislation and if so inclined, vote your conscience this November, whichever way you lean.