Saturday, April 10, 2010

New Health Care Law and Taxes

I had an exchange with someone about health care the other day, and I think it is somewhat informative on the issue of taxes (increases and decreases) and the new health care law. It began when this person said that under the new law, her sister’s family would have to pay $4,000 more in taxes each year and would consequently be unable to afford their health insurance and then would be fined for not having insurance.

This, of course, would be an alarming occurrence since the new law is suppose to increase access to health care, not take away insurance. So, I asked this person why her sister’s family would have to pay more in taxes. Instead of giving an answer that spoke directly to this case, she directed me to two articles about taxes and the new health care law: one in the Washington Times, and a second in Kiplinger’s magazine. I found a third with the same information in the Christian Science Monitor.

After reading each of these articles closely, here’s what I learned about taxes in the new law. From these articles, there are five likely sources of that $4,000.

First, this family might make excessive visits to an indoor tanning bed each year adding up to the additional tax. That's probably not the source, but if it is then I'm won't be that sympathetic. (It would take a whole lot of trips to the tanning salon to add up to $4,000 in taxes. This is a 10% tax on indoor tanning services. To pay $4,000 in this tax in a given year, a person would have to spend at least $40,000 in that one year for indoor tanning bed services.)

Second, these articles note that before the law passed, people could deduct medical expenses beyond 7.5% of their income, but the new law makes it 10% of their income. For this to be the source of the additional $4,000, this family's annual income would have to be at least $160,000. (This is actually a very low estimate because I really just calculated $4,000 less in tax deductions. To make it $4,000 less in taxes would mean a larger deduction and, hence, a larger annual income -- probably around $190-200K if not higher.) The problem here is that it doesn’t really make sense that they would have to go without insurance because of the $4,000 tax. Their household income would be more than 3-times the national average and should allow enough of a cushion to avoid any truly painful financial decisions, such as whether to keep or forgo health insurance.

Third, the articles note that the new law includes a Medicare tax increase for households with incomes $250,000 or higher. Any household with less than $250K (or individual earning less than $200K) will pay no more in Medicare taxes than they currently do. I did not estimate the exact income to get the $4,000 because at this income level, I can’t see how that tax increase would force someone to drop their health insurance.

Fourth, the article states that Medicare taxes will now apply to capital gains over $250,000 for a household. To earn this much in capital gains, a family must have several hundred thousand dollars in stocks, bonds, etc. (Average household wealth in the US is about $80K, and most of that is in home equity not liquid assets.) Again, a $4,000 tax increase should not lead such a family to drop their health insurance.

Fifth, the article notes that very expensive health insurance programs will be taxed pretty heavily. These are health plans that cost more than $27K for a family. (My family’s health plan costs about $11K including employer contributions. This is a fairly average plan.) Most of these plans seem to be held by two groups: executives and professionals with fairly high incomes, or industrial workers represented by strong unions (e.g., autoworkers). In the case of the former, their incomes are generally high enough that going without insurance should not be a serious option. In the case of the latter, the cost of health insurance is arrived at through collective bargaining; when the next contract negotiations occur, the cost of the health plan will be addressed. In any event, this tax does not begin until 2018. So, this cannot really be the source of the $4,000 in additional taxes.

After reading the articles suggested by this person, I shared these scenarios with her to see which most closely matched the situation she described. Her response was that she couldn't say anything more about the situation. It was too personal, too secret.

Given the evidence that she presented and her subsequent response, I can only assume that the claim of a $4,000 tax increase leading to a loss of insurance (1) is an unfounded claim (the tax increase won't happen), (2) is an exaggerated claim (the health insurance won't actually be lost), or (3) involves some other personal calamity (e.g., crisis regarding someone’s job, family, or health) that has really created the financial despair rather than the tax increase.

(Had I been given evidence of how this situation would come to pass, I would have accepted it. That's why I asked about the specific context to begin with. But, the evidence I was given just did not seem to support the claim.)

It is a serious charge that the health care law will take health care away from people because that's the opposite of what the law should do. I hope that would not happen, and I would be upset if it did. But after looking at the different tax increases and decreases associated with the law, I sincerely doubt that loss of insurance will happen in this case -- unless there is some crucial information that hasn't been shared.

This new law obviously has positive and negative elements to it, and some people will pay more taxes. But the scenario described here (a $4,000 tax increase leading to loss of insurance and a fine) does not strike me as a legitimate complaint about the health care law.

In sum, I think this is informative for a couple of reasons. First, it highlights the situations under which taxes will increase. Second, it is one more reminder to be cautious about the dire warnings regarding this new law. There may be plenty to critique about the new law, but there also seems to be much misinformation swirling about.

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