Another Year, another Obamacare Tax

May 13, 2013

This year it was the medical excise tax, next year it will be the “annual fee on health insurance.”

Last week, the Subcommittee on Health and Technology held a hearing to discuss the next tax to go into effect to fund Obamacare: the “annual fee” (tax) on health insurance. In the first year, this tax will total $8 billion, apportioned among health insurance companies based on their net premiums. The total cost of this tax will then grow to more than $14 billion in 2018, after which it will be set to grow indefinitely, indexed to the growth of healthcare premiums.

Prior to the hearing they released a memo discussing the new tax’s possible effects on small business and the economy.

The memo highlights research on the downsides of the tax:

Both the JCT and CBO estimate that a vast majority of the tax will be passed on the consumers. Specifically, the JCT estimated that getting rid of this tax would save families $350 to $400 on their premium in 2016.

Even more, since there is an exemption for those who self-insure—most commonly large employers—the majority of this tax will fall on small businesses. According to a study by the Nation Federation of Independent Business Research Foundation, the increased premiums on businesses “could reduce private sector employment by 146,000 to 262,000 in 2022, with a majority of those losses falling in the small business sector.”

Another study found that the insurance fee will increase premiums by 1.9 percent to 2.3 percent in the first year of this tax and a projected annual growth of premiums of 1.8 percent after that. This translates to an additional $2,794 for individuals and $5,140 for families over the next ten years. Even more, the study said that some small businesses could see dramatic premium increases.

However, testimony from CBPP argues that combined with all the other provisions in Obamacare, the effect of the tax will be negligible to employers. In their testimony, they cite the CBO which claims that that Obamacare’s effect on premium prices will be between a 1 percent increase and a 2 percent decrease.

This assumes, of course, that the highly complex structure of Obamacare created all the right incentives and all those incentives line up correctly and lead to lower health insurance costs, mitigating all negative effects of this tax. With all the implementation issues and political issues Obamacare faces, this seems like a dream rather than a reality.

It is more likely that Obamacare won’t work perfectly: the fee will raise premiums and there will be some negative effect on employment. If this is the case, the effects of this new fee on premiums seem to contradict the purpose of Obamacare, which was meant to reduce the cost of healthcare, not increase it.

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