WASHINGTON (AP) — New taxes are coming Jan. 1 to help finance President Barack Obama’sáhealthácare overhaul. Most people may not notice. But they will pay attention if Congress decides to start taxing employer-sponsoredáhealtháinsurance, one option in play if lawmakers can ever agree on a budget deal to reduce federal deficits.
The tax hikes already on the books, taking effect in 2013, fall mainly on people who make lots of money and on theáhealthácare industry. But about half of Americans benefit from the tax-free status of employeráhealth insurance. Workers pay no income or payroll taxes on what their employer contributes foráhealtháinsurance, and in most cases on their own share of premiums as well.
It’s the single biggest tax break the government allows, outstripping the mortgage interest deduction, the deduction for charitable giving and other better-known benefits. If the value of job-basedáhealtháinsurance were taxed like regular income, it would raise nearly $150 billion in 2013, according to congressional estimates. By comparison, wiping away the mortgage interest deduction would bring in only about $90 billion.
“If you are looking to raise revenue to pay for tax reform, that is the biggest pot of money of all,” said Martin Sullivan, chief economist with Tax Analysts, a nonpartisan publisher of tax information.
It’s hard to see how lawmakers can avoid touchingáhealtháinsurance if they want to eliminate loopholes and curtail deductions so as to raise revenue and lower tax rates. Congress probably wouldn’t do away with the healthácare tax break, but limit it in some form. Such limits could be keyed to the cost of a particularáhealth insurance plan, the income level of taxpayers or a combination.
Many economists think some kind of limit would be a good thing because it would force consumers to watch costs, and that could help keepáhealthácare spending in check. Obama’sáhealthálaw took a tentative step toward limits by imposing a tax on high-valueáhealtháinsurance plans. But that doesn’t start until 2018.
Next spring will be three years since Congress passed theáhealthácare overhaul but, because of a long phase-in, many of the taxes to finance the plan are only now coming into effect. Medicare spending cuts that help pay for covering the uninsured have started to take effect, but they also are staggered. The law’s main benefit, coverage for 30 million uninsured people, will take a little longer. It doesn’t start until Jan. 1, 2014.
The biggest tax hike from theáhealthácare law has a bit of mystery to it. The legislation calls it a “Medicare contribution,” but none of the revenue will go to the Medicare trust fund. Instead, it’s funneled into the government’s general fund, which does pay the lion’s share of Medicare outpatient and prescription costs, but also covers most other things the government does.
The new tax is a 3.8 percent levy on investment income that applies to individuals making more than $200,000 or married couples above $250,000. Projected to raise $123 billion from 2013-2019, it comes on top of other taxes on investment income. While it does apply to profits from home sales, the vast majority of sellers will not have to worry since another law allows individuals to shield up to $250,000 in gains on their home from taxation. (Married couples can exclude up to $500,000 in home sale gains.)
Otheráhealthácare law tax increases taking effect Jan. 1:
• A 2.3 percent sales tax on medical devices used by hospitals and doctors. Industry is trying to delay or repeal the tax, saying it will lead to a loss of jobs. Several economists say manufacturers should be able to pass on most of the cost.
• A limit on the amount employees can contribute to tax-free flexible spending accounts for medical expenses. It’s set at $2,500 for 2013, and indexed thereafter for inflation.