The Obama Administration> is embarking on a full court press to get its health care takeover plan, called the America's Affordable Health Choices Act of 2009, through Congress. The proposed legislation calls for monumental changes a government-run health-care system that competes with private insurers and coverage for tens of millions of uninsured people at a monumental cost. Right now, the plan is estimated to cost more than $1 trillion over the next 10 years (but it could go a lot higher).
Contrary to what you may have heard or read, the proposed tax hikes aimed to help pay for this plan would not just affect the "rich." Even worse, they are likely just the initial salvo as Washington attempts to tax its way out of yet another huge increase in the already out-of-control federal budget deficit. Here's what you need to know.
Tax Hit on Your Flexible Spending Account
Under current law, you can receive tax-free reimbursements from your employer-provided flexible spending account (FSA) plan to pay for both prescription drugs and over-the-counter items such as pain relievers, allergy medications, antacids, and the like. Starting next year, the new law would ban tax-free FSA reimbursements for non-prescription medications. The same change would apply to health savings accounts (HSAs). This is not a really big deal, but you have to wonder if it's the first step toward banning tax-favored health care FSAs and HSAs altogether. Of course, the primary beneficiaries of FSAs and HSAs are middle-class folks not the "rich."
Tax Hit if Your Health Coverage Isn't 'Acceptable'
Say you have an individual health insurance policy because you're self-employed or work for a small company that doesn't provide coverage. Under the new law, your current plan might be deemed "unacceptable" to the feds if it has a lifetime limit on benefits or for some other reason that would take too long to explain here. A grandfather provision would allow you to keep your plan as long as you don't make any changes (like increasing the deductible to keep the cost down). But if you do make changes, you would be forced to switch to an "acceptable" plan or get hit with a penalty tax. The proposed penalty: up to 2.5% of the difference between your adjusted gross income (the number on the bottom of page 1 of your Form 1040) and the minimum amount of income that requires filing a federal return. For most folks, this figure ranges between $9,350 and $18,700 for 2009. For example, if you're a married joint-filer with adjusted gross income of $80,000, the penalty tax could be slightly over $1,500, based on 2009 numbers.
Even if you want to keep your existing "grandfathered" plan without making any changes, it's likely to go out of business before long because the new law would prevent that plan from enrolling any new members.
Tax Hit on Employers That Don't Provide 'Acceptable' Coverage
For all but the smallest companies, the new law would impose a penalty tax equal to 8% of payroll if "acceptable" health coverage is not provided for employees. Employers that provide coverage but fail to meet the new law's participation requirements would get socked with a penalty of up to $100 per day for each non-covered employee.
Honestly, I don't know if I could dream up a surer way to kill jobs.
Tax Hit on the 'Rich'
Last but not least, let's cover what the new law would do to high-income individuals.
Married joint-filing couples would face the following tax increases starting in 2011:
1% "surtax" on adjusted gross income (AGI) between $350,000 and $500,000 (after 2012, the rate could go up).
1.5% "surtax" on AGI between $500,000 and $1 million (after 2012, this rate could go up too).
5.4% "surtax" on AGI above $1 million.
For unmarried individuals, the AGI thresholds would be 80% of the amounts listed above.
Remember that Obama has already committed to raising the top two federal tax rates to 36% and 39.6%, starting in 2011 (up from the current 33% and 35%). He has also committed to restoring phase-out rules that will wipe out personal exemption write-offs and itemized deductions for high-income individuals. The proposed "surtaxes" would be on top of these already-promised tax hikes. After considering state income taxes, some "rich" folks would face marginal tax rates approaching 60%, which would almost certainly cause them to rein in spending. That will result in fewer jobs for hotels and restaurants, retailers, home builders and many other businesses large and small alike. Taxing the heck out of the "rich" is certainly not going to improve the economy.
The Last Word
For years, Democrats have lectured Republicans, with some justification, that cutting taxes is not the solution to every problem. Now the Democrats need to be lectured that all problems cannot be fixed by raising taxes, increasing government spending, and regulating everything in sight. A recent Rasmussen poll says a whopping 78% of voters believe what the Democrats have in mind for health care will mean higher taxes on the middle class and not just on the "rich." I'm sure this is correct, and what we are being told right now is most likely only the beginning.