New Taxes for Health Care Help Obama ‘Spread the Wealth Around’

http://www.bloomberg.com/apps/news?pid=20601087&sid=ake7tOWwUT6E

By Ryan J. Donmoyer

March 22 (Bloomberg) -- President Barack Obama said on the campaign trail in October 2008 that he wanted to "spread the wealth around." With Obama on the verge of signing sweeping health-care overhaul legislation, he's about to do just that.

High-income investors would pay higher Medicare taxes, tax breaks for out-of-pocket medical deductions would be curtailed, and it would cost insurance companies more to pay executives millions of dollars. Those levies will help fund expansion of Medicaid services for the poor and subsidize health insurance to cover millions who don't currently have benefits.

"It's very clear that taxes are levied on the wealthy and the benefits will spread across the entire income distribution, with a lot going to expanded Medicaid distribution and expanding health insurance," said Roberton Williams, an economist at the Tax Policy Center, a Washington research institute backed by the Urban Institute and Brookings Institution. "One couldn't claim he didn't keep that promise" to "spread the wealth around."

In all, the bill would generate $409.2 billion in additional taxes by 2019, according to an analysis by the congressional Joint Committee on Taxation, a nonpartisan agency. The bill also imposes about $69 billion more in penalties for individuals and businesses who don't meet mandates to buy insurance, according to the Congressional Budget Office, another nonpartisan agency.

Higher Medicare Taxes

Most of the revenue would come from higher Medicare taxes on about 1 million individuals earning more than $200,000 and about 4 million couples filing jointly who make more than $250,000.

The legislation would for the first time apply Medicare taxes to investment income received by these households beginning in 2013. The 3.8 percent rate would apply to unearned income such as realized capital gains, dividends, interest, rents, and royalties. It wouldn't apply to other income subject to income taxes, including interest from municipal bonds and retirement accounts such as 401(k) plans until funds are withdrawn.

Obama's budget proposes to allow the existing 15 percent tax rate on dividends and capital gains to rise to 20 percent in 2011 for the same high-earners. Layering a 3.8 percent Medicare tax on top of that would mean a new top rate on dividends and capital gains of 23.8 percent. The top tax rates on interest and rental income would rise to as high as about 44 percent, assuming other Obama tax increases on high-earners are enacted.

The bill also increases the individual's share of Medicare tax currently imposed on salaries starting at $200,000 for individuals and $250,000 for couples to 2.35 percent, from 1.45 percent currently.

Cost to Couples

The combination of the new Medicare taxes and Obama's budget proposals, if they were in place this year, would cost a married couple with a household income of $5 million an extra $287,100 in taxes, according to analysis by the consulting firm Deloitte Tax in Washington.

The Medicare taxes superseded an earlier Senate proposal to tax high-value employer-provided insurance coverage, dubbed "Cadillac plans." That 40 percent excise tax was delayed until 2018, when it would begin to apply to benefits over $10,200 for individuals and $27,500 for couples.

Those thresholds would be indexed to inflation, which grows at a slower pace than the cost of health care, meaning more employers would likely face the levy over time.

Other provisions likely to affect higher-income individuals would scale back tax preferences associated with paying out-of- pocket medical expenses. Starting in 2013, Americans under 65 won't be able to deduct medical expenses until they exceed 10 percent of income, up from 7.5 percent now; retirees would keep the lower threshold.

Savings Accounts

The bill in 2011 places new restrictions on what can be purchased using special savings accounts funded with pre-tax dollars including health savings accounts. Improper withdrawals from the accounts also would be hit with a new 20 percent tax.

And the legislation for the first time would place a $2,500 limit on what can be contributed to employer-sponsored flexible spending accounts, another type of account funded with pre-tax dollars that can be used to pay for medicines, co-payments, and other expenses.

Employers currently set their own limits, typically between $3,000 and $5,000 in the absence of a government cap. This change would cost an average worker about $625 in tax savings, according to WageWorks Inc., a San Mateo, California, company that administers 1.5 million accounts.

Tanning Salons

Consumers who frequent tanning salons would pay a 10 percent excise tax, and those who buy devices such as wheelchairs would pay a 2.9 percent excise tax. Drugmakers may pass on a $3 billion annual fee. Insurers would be denied deductions for executive pay over $500,000.

Under the reconciliation bill, individuals who don't purchase insurance would be subject to a fine of $325 in 2015 and $695 in 2016. Individuals may be subject to a charge equal to as much as 2.5 percent of their income in 2016, if the total is greater than the flat payment.

Employers with 50 or more workers would pay $2,000 per worker if they don't offer health insurance. The legislation offers a small business tax credit to help pay for employer- provided premiums.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net;

Last Updated: March 22, 2010 00:01 EDT