The Foundry

The New House Health Care Plan has several tax increases that will cost taxpayers $700 billion in the next ten years. Several of these taxes are new and were not in the earlier House bills.

The Surtax
The new Pelosi plan establishes a 5.4% surtax on joint filers with over $1 million in adjusted gross income or $500,000 for single filers. This is a single rate, which is different from the earlier House bills that had surtaxes at lower income levels. This surtax is not based on final adjusted gross income, but instead modified gross income. Thus the effective rate of the surtax is higher than just increasing marginal tax rates by 5.4%.

This surtax is also not indexed to inflation. This will cause more and more taxpayers to be hammered by the surtax even as their real income does not increase. This is one of the reasons that the Joint Tax Committee expects the cost of the surtax to more than double in year 10 of its estimate to $68.4 billion from $30.9 billion in 2011. The Joint Tax Committee estimates that taxpayers will be forced to pay $460.5 billion in higher taxes due to this provision. This is a larger tax increase than the 1993 Clinton income tax increase provisions that created a new tax bracket for high income taxpayers, increased the AMT, limited deductions and exemptions for high income earners.

Business Taxes
Businesses could pay a penalty of 8% on the average wage of their employees if they do not offer qualified health insurance. Small businesses with less than $500,000 in total payroll will be exempt from the business. Businesses with total payroll from $500-$750,000 will pay less than the full 8% depending on their total payroll size.

Business Rate Table
Does not exceed $500,000 ………………………….0 percent
Exceeds $500,000, but does not exceed $585,000 2 percent
Exceeds $585,000, but does not exceed $670,000 4 percent
Exceeds $670,000, but does not exceed $750,000 6 percent

Copying Baucus
The House bill copies the Baucus framework of having several small tax increases in an effort to raise additional income. For example, the House bill now also limits Flexible Spending Accounts to $2500 and limits the ability of FSA or HSAs to purchase goods by excluding over the counter drugs.

Here is a full list of the additional House tax increase items and their cost:
1. Health Savings Account Tax: Increases tax on health savings account funds not used for medical purposes from 10% to 20%. ($1.3 billion)
2. Flexible Spending Arrangement Cap: Caps contributions to flexible spending accounts at $2,500. ($13.3 billion/ ten years)
3. Medical Devices Excise Tax: Imposes 2.5% excise tax on sale of medical devices. ($20 billion/ ten years)
4. Self-Insured Health Fee: Imposes fee on insured and self insured health plans.
5. Itemized Deductions Definition: Conforms the definitions of medical expenses from employer-provide health insurance, merging flexible spending arrangements, health reimbursement arrangements, health savings accounts and archer MSAs to the definition of itemized deduction. ($5 billion/ ten years)
6. Medicare Part D: Eliminates deduction for expenses that can be allocated to the Medicare Part D subsidy. ($3 billion/ ten years)
7. Payments to Corporations: “Requires information reporting on payments to Corporations” ($17.1 billion/ ten years)
8. Worldwide Interest Allocation: Delays implementation of interest allocation. ($26.1 billion/ ten years)
9. Treaty Benefits Limit: Limits the treaty benefits for some deductible payments. ($7.5 billion/ ten years)
10. Economic Substance Payments: Codifies economic substance doctrine and imposes penalties for underpayments. ($5.7 billion/ ten years)