Obamacare Tax Increases Will Impact Us All

March 05, 2013

The trillion dollars in tax increases from the Affordable Care Act have the potential to hinder small business and investment, and further set back a struggling economy.

The Joint Committee on Taxation recently released a 96 page report on the tax provisions associated with Affordable Care Act. The report describes the 21 tax increases included in Obamacare, totaling $1.058 trillion – a steep increase from initial assessment. The summer 2012 estimate is nearly twice the $569 billion estimate produced at the time of the passage of the law in March 2010.

Last summer, the House Ways and Means Committee detailed the breakdown of each tax provision in a chart, which we reproduced here.

 

Provision 

March 2010 Estimate, 2010-2019, $US billion

June/July 2012 Re-Estimate, 2013-2022, $US billion

Additional 0.9 percent payroll tax on wages and self-employment income and new 3.8 percent tax on dividends, capital gains, and other investment income for taxpayers earning over $200,000 (singles) / $250,000 (married)

210.2

317.7

“Cadillac tax” on high-cost plans *

32

111

Employer mandate *

52

106

Annual tax on health insurance providers *

60.1

101.7

Individual mandate *

17

55

Annual tax on drug manufacturers/importers *

27

34.2

2.3 percent excise tax on medical device manufacturers/importers* 

20

29.1

Limit FSAs in cafeteria plans *

13

24

Raise 7.5 percent AGI floor on medical expense deduction to 10 percent *

15.2

18.7

Deny eligibility of “black liquor” for cellulosic biofuel producer credit 

23.6

15.5

Codify economic substance doctrine

4.5

5.3

Increase penalty for nonqualified HSA distributions *

1.4

4.5

Impose limitations on the use of HSAs, FSAs, HRAs, and Archer MSAs to purchase over-the-counter medicines *

5.0 

4

Impose fee on insured and self-insured health plans; patient-centered outcomes research trust fund *

2.6

3.8

Eliminate deduction for expenses allocable to Medicare Part D subsidy

4.5

3.1

Impose 10 percent tax on tanning services *

2.7

1.5

Limit deduction for compensation to officers, employees, directors, and service providers of certain health insurance providers

0.6 

0.8

Modify section 833 treatment of certain health organizations

0.4

0.4

Other Revenue Effects

60.3

222**

Additional requirements for section 501(c)(3) hospitals

Negligible

Negligible

Employer W-2 reporting of value of health benefits

Negligible

Negligible

Total Gross Tax Increase:

569.2

1,058.3

* Provision targets households earning less than $250,000.

** Includes CBO’s $216.0 billion estimate for “Associated Effects of Coverage Provisions on Tax Revenues” and $6.0 billion within CBO’s “Other Revenue Provisions” category that is not otherwise accounted for in the CBO or JCT estimates.

Source: Joint Committee on Taxation Estimates, prepared by Ways and Means Committee Staff

 

These new taxes will hit small businesses hard. Owners of small businesses will face a tax increase on self-employment income and the employer mandate will pose huge challenges to many small businesses. Businesses that work with small profit margins and have workers with relatively low wages may have to close up shop. Businesses that are able to comply will be forced to reduce worker wages and raise prices on customers.

The cost of compliance is another ding on the budgets of small business, large business, medical providers and individuals. The Obamacare Burden Tracker pegs the total cost of compliance at 127.6 million hours. That’s 127.6 million hours of productive work the U.S. economy loses to complexity. 

Add the complexity and the cost to small businesses to the investment tax increase in the ACA, and the tax provisions in the law could do some real damage to economy. Following the fiscal cliff tax increases and the additional 3.8 percent investment tax from the ACA, the U.S. now has a combined state and federal capital gains rate of 28 percent, up from 19 percent in 2012. High investment tax rates discourages the free flow of capital and damages long-term economic growth.

The economic effects of the increases in investment taxes from the ACA won’t necessarily be felt immediately, but will harm future development. Less capital will lead to less future productivity, which will lead to lower future wages.

But small businesses and individuals will feel the other effects of the tax increases in the ACA much sooner, as businesses learn to comply with the law and all its provisions over the next couple years.

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