The 2014 Obamacare tax wave
By: Rachael Bade
January 6, 2014 11:16 PM EST
Tanning salons, colonoscopy scopes and prescription drugs like Xanax — they’re all items hit by taxes in recent years to fund President Barack Obama’s health care law.
Starting in 2014, the Obamacare tax man is coming for insurance companies — who contend a good chunk of these costs will be passed on to consumers in the form of higher premiums.
And with those now in effect, almost all of the taxes that will be used to offset the cost of Obamacare are in place.
The new levies include a multibillion-dollar assessment on insurance companies based on their market share, a fee that will be used to compensate insurers who take on the most costly policyholders and a penalty for individuals who decide to remain uninsured. A tax on so-called Cadillac health plans, set to begin in 2018, is the last major provision to kick in.
This is also the first year wealthier Americans will feel the Affordable Care Act tax squeeze from several levies that began in 2013 but won’t be paid out until the upcoming tax filing season a few weeks away.
Of course, the flow of tax dollars goes both ways under the president’s signature health care law. Starting this year, low-income Americans can begin receiving tax credits for their insurance costs — a process that will be closely watched following the botched rollout of the Obamacare website.
What follows is an overview of the 2014 ACA tax-and-fee wave.
Take a HIT and pass it on
This year, insurers will collectively pay an $8 billion health insurance tax known as HIT, a fee that will vary based on a company’s market share. Annual collections will increase to $14.3 billion by 2018, and more than $100 billion will be brought in over the next decade.
The million-dollar question is how much of this cost insurers will pass on to consumers.
Insurers have been sounding the alarm that the tax will lead to an increase in premiums, but the law’s supporters argue the industry is just trying to protect profits and build support for repealing the tax.
Insurers point to a study done by international consulting firm Oliver Wyman a few years ago that found the tax would increase premiums by more than $2,800 per person and $6,800 per family over a decade. The study was paid for by the industry’s leading trade group, America’s Health Insurance Plans, which is lobbying hard to get the tax repealed.
Obamacare supporters say those warning of higher premiums because of the tax on insurers and other levies are crying wolf.
Topher Spiro, of the left-leaning Center for American Progress, said these taxes could easily be “offset by additional revenue that the health insurance industry will get over the coming years” because of the law’s requirement that most people get insurance.
But some independent analysts said that while insurers are most likely inflating the impact the tax will have on premiums, consumers can expect to bear some of the cost.
“Typically, the costs of a tax are split between the seller and the buyer,” saidBob Williams, a fellow at the center-left Tax Policy Center and a former deputy assistant director for tax analysis at the Congressional Budget Office.
For instance, the nonpartisan Joint Committee on Taxation said premiums will increase 2 percent because of the tax — about $350 to $400 per family by 2016.
“The fact that the statutory incidence of the health insurance fee is on the insurer does not alter the economic incidence of the tax, which is the same regardless of who writes the check to the government,” the JCT wrote in a 2011 letter to former Sen. Jon Kyl (R-Ariz.).
With the tax now going into place, the debate will move from theory to reality, and it may soon become clearer to what extent the tax bump contributes to higher premiums.
A pain in the bellybutton?
A temporary, three-year tax on insurers, which will redistribute the money back to select health care providers as a sort of financial safety net, also officially kicked in Jan. 1.
Some politicians call it the bellybutton tax — because it also applies to a policyholder’s spouse and dependents — while policy wonks know it as the “reinsurance fee.”
By either name, it’s basically insurance for the insurers that spreads out risk. This year, insurers will owe Uncle Sam $63 per health insurance recipient — about $12 billion. The program will then hand over the money to insurance companies that find themselves taking on the most costly patients, those with severe health problems.
It’s a tax that insurers and AHIP actually welcome. The Department of Health and Human Services estimates that it will reduce premiums in the individual market in 2014 by 10 percent to 15 percent compared with what they would have been without the program.
But critics say it’s costly.
Ways and Means Committee tax subcommittee Chairman Pat Tiberi (R-Ohio) and Rep. Daniel Lipinski (D-Ill.), who have a bill to repeal the fee, say the tax is unfair because the cost will be passed to policyholders of employer-sponsored health care plans who “get nothing in return.”
Further fueling the political fire, the Obama administration has announced plans to exempt unions — traditional friends to the Democrats — from the tax.
ACA hits the wealthy
Obamacare targets richer Americans with new taxes that took effect in 2013 — but several of those won’t be paid until they file their 2013 returns on or before April 15.
That includes a 3.8 percent surtax on unearned income from capital gains and dividends for individuals earning more than $200,000 and couples earning more than $250,000.
The same income group also saw a 0.9 percent Medicare wage tax increase in 2013, but some might start noticing only when they file their returns. For instance, the individual paychecks of a couple whose members each made $150,000 would not likely include the 0.9 percent withholding. But if they file jointly, at $300,000, they’ll see the tax added to their IRS bill this year.
Both items will bring in $317 billion over a decade, a big portion of the more than $700 billion worth of the roughly 20 taxes that fund ACA.
A higher standard for deducting medical expenses from tax bills will also become apparent when affected taxpayers file their 2013 returns in the coming months. That’s because starting with tax year 2013, taxpayers younger than 65 must show that such costs compose 10 percent of their incomes in order to write them off, up from 7.5 percent previously.
The individual mandate
The penalty for being uninsured also kicks in this year — though these individuals won’t have to pay up until early 2015 when they file their 2014 returns.
March 31 is the deadline to be insured and dodge the penalty, which this year is $95 or 1 percent of your income, whichever is greater. Those amounts go up to 2 percent or $325 in 2015 and 2.5 percent or $695 in 2016.
Some, including Scott Hodge, president of the conservative Tax Foundation, speculate that the administration will delay the penalty this year, just as it did for the employer mandate.
“There will be political backlash,” he said.
The price of HealthCare.gov
Don’t forget about the website.
Starting this year, insurance companies that sell their plans on HealthCare.gov will have to pay a monthly fee that amounts to 3.5 percent of the premiums they sold on the website.
This levy has been less controversial, but opponents of the law say it won’t be without a cost to consumers and any issue related to the website has the potential to become a contentious issue.
And lastly, there are the credits
This year also kicks off Obamacare tax breaks that will help millions of low-income Americans pay health premiums.
This month the government will start cutting checks to insurance companies to help pay the medical expenses of qualifying Americans — those whose incomes are less than 400 percent of the poverty line or individuals making less than $45,900 and a family of four making less than $94,000.
The total credit awarded is contingent on how much a person earns that year, so the less an individual earns, the greater the subsidy.
Without the credits, experts say many of these cash-strapped individuals wouldn’t be able to follow the ACA requirement to purchase insurance. That’s why tax preparers expect most recipients to take these credits in advance, starting now. But the exchanges also give recipients the choice of taking a partial credit now rather than the full amount, or waiting to receive the full credit as a tax refund next year, if they can afford to wait to be reimbursed.