Wednesday, February 24, 2010

The Tax Implications of the Latest Health Care Reform Plan

President Obama recently put health care reform back into the spotlight by putting forth his own plan, loosely based on the legislation drafted by the House and Senate over the past year. In order to pay for the high price of reform, Obama’s proposal includes a number of tax increases.

Basics of the Legislation

Obama’s plan would cost an estimated $950 billion over the next ten years, and according to it would extend coverage to 31 million Americans. It would end discrimination against Americans with pre-existing conditions, and bring greater accountability to the health care industry. The President even claims the plan would reduce the deficit by $100 billion in the next decade, and $1 trillion during the second decade.

Opposition and 51 Vote Passage

Republicans in Congress have strongly opposed previous health care reform attempts and they now have enough votes to filibuster any future legislation. However, the White House and Democratic leaders in the Senate have threatened to use a process called “reconciliation” that would allow them to pass a bill with only 51 votes. Technically, this tactic can only be used on tax and spending bills, the most notable example was when President Bush used a reconciliation vote to pass the now infamous Bush Tax Cuts.

Medicare Tax Increase

The centerpiece of Obama’s plan to pay for the costs of health care reform is a 0.9% increase on the Medicare tax rate for individual taxpayers earning $200,000 or more per year. The rate increase would also apply to married couples earning over $250,000 a year that file a joint return.

Medicare Tax Extension

Another Medicare related tax increase is Obama’s desire to impose the 2.9% tax rate on interest, dividends, annuities, and most other investment income for individuals making over $200,000 and joint filers making over $250,000 per year.

This would represent a drastic change in American tax laws as the Medicare tax is typically considered a payroll tax that is only levied on wages. According to the Chicago-based Bretton Woods Research group, the 2.9 % tax on unearned income would produce a 3.5 percent to 4 percent decline in the broad stock indices.

Lesser Penalty for High End Policies

Obama’s proposal does include a tax on high-cost (Cadillac) health insurance policies, but it would not take effect until 2018 – as opposed to the 2013 date in the Senate’s legislation. Although the tax will be levied on insurers it is widely expected to result in reduced benefits for employees. In his proposal, Obama did raise the limits on this tax, and if the legislation became law the excise tax would only apply to individuals with premiums above $10,200 and $27,500 for families.

Fees on Pharmaceutical Business

Another source of funding in Obama’s plan are fees on the pharmaceutical industry – led by New York-based Pfizer – would be forced to pay over $10 billion in fees over the next 10 years. These fees would take effect faster than the Cadillac taxes, as pharmaceutical companies could begin making payments as early as 2011.

Fate of the Legislation

In order to become law, Obama’s proposal will have to jump through a few hoops. Both the Senate and the House of Representatives need to pass the controversial bill before it can be presented to Obama for a signature. Republican leaders are already speaking out about the legislation, and it will no doubt be a hot topic at tomorrow’s health summit at the Blair House.

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