Health care reform contains tax increases hidden in plain sight

To pay for health care reform, you’ll find billions of dollars in tax increases tucked inside the two major bills now before Congress – with each taking a vastly different approach to who ends up paying.

Will it be the wealthiest among us, as proposed by the House bill, which levies a 5.4 percent income tax surcharge on those earning more than $500,000 a year?

Or might it be a broad swath of the middle class, hit by an array of tax code changes on medical expenses and taxes levied on insurance policies, drug manufacturers and others in the health industry, which say they’ll pass these costs on to consumers?

The final outcome may be parts of both approaches – but any way you cut it, someone will be paying higher taxes to support the costs of reform. Those costs include subsidies for some families to help them buy health insurance, starting in 2013 or 2014, and expanded government coverage for some.

Here’s a quick look at the tax proposals in each of the major bills:

House bill: It would raise about $46 billion a year by levying an income tax surcharge on single people earning more than $500,000 a year and couples earning more than $1 million. Only 700 taxpaying households in Montana fall into those categories.

It also would tax medical devices and limit tax-free medical “flex” spending accounts to $2,500.

Senate bill: It has a controversial 40 percent tax on so-called “Cadillac” health plans; levies an annual fee on insurers, drug makers and medical device makers; and raises Medicare payroll taxes for singles earning more than $200,000 a year and couples earning more than $250,000.

It also limits flex spending accounts and medical-expense tax deductions.

U.S. Sen. Max Baucus, D-Mont., a chief architect of the Senate bill, opposes the income tax surcharge in the House bill and says the Senate bill “pays for health care reform with health-care dollars.”

He also argues that for many low- and middle-income families, the bill will end up cutting their costs, because it will provide subsidies to help them buy health insurance (starting in 2014).

Critics of the Senate approach – particularly the excise tax on health coverage – say its package of taxes clearly will hit middle-class workers who have decent health benefits, but may not see much in direct benefits from the reforms.

“I think Montana public employees are going to be hammered hard by that excise tax,” says Eric Feaver, president of MEA-MFT, the state’s largest labor union, which represents 18,000 teachers and other workers. “We are just amazed at how, to this point, we’ve been unable to convince Senator Baucus of that fact.”

The excise tax would be levied on the “aggregate value” of health care benefits that exceed $8,500 for single people and $23,000 for families, starting in 2013.

The aggregate value is what you and your employer, combined, pay for your medical, dental and vision policies, plus any spending from your medical flex spending account. For most workers, that amount easily stretches into the thousands of dollars per year.

Feaver doubts family policies will be affected much in Montana, but says the aggregate value of policies for many single people covered by company plans could easily exceed the $8,500 threshold by 2013.

To avoid the 40 percent tax, workers and their employers would buy less coverage, resulting in more medical costs for the employees, Feaver says.

Supporters of the tax, including Baucus, argue that the money saved by buying cheaper coverage would be converted to higher wages for workers.

Feaver’s response: “I just flat don’t buy it. … There will be a significant tax on insurance and my members are going to be paying it. And I consider them to be middle class.”

Another target of criticism in the Senate bill is its fees on health insurers and other health-related industries. These fees, such as $6.7 billion annual charge on insurers nationwide, would take effect for 2009, if the bill passes.

Blue Cross & Blue Shield of Montana, the state’s dominant health insurer, says its share of the fee would be $8 million to $12 million a year. It estimates that this tax and others on drug makers and medical device manufacturers would increase the cost of a policy for a family of four by at least $350 a year.

New West Health Services, the second-largest private health insurer, says it would pay about $1.1 million a year.

“We really have no choice but to pass these additional costs on to the insurance-buying consumer,” says Tanya Ask, vice president of external and provider services for New West.

Baucus argues that once wider insurance reform efforts begin in 2013, there will be more competition in health insurance markets, making it harder to pass these costs on to consumers.

Employees with access to medical flex spending accounts also could see some tax increases, when the accounts are limited to $2,500.

For example, 9,400 state and university system workers put

$10.5 million into these accounts this year, saving themselves a few million dollars in taxes. State workers can put up to $5,000 in the accounts; university workers up to $6,000.

Imposing the new, lower ceiling would mean higher income and payroll taxes for those who now exceed $2,500.

Supporters of the lower threshold argue that flex accounts benefit only some workers, and that most don’t put more than $2,500 into an account. Still, the change would be a tax increase levied on mostly middle-class workers.

While no one is enthusiastic about paying higher taxes, two prominent supporters of the health reform bills – AARP and Montana Change That Works, a labor-funded organization – say they can live with the taxes in the Senate bill.

“AARP believes that some investment is necessary to improve our health-care system,” says Stacia Dahl, spokeswoman for AARP-Montana. “We believe shared responsibility – individuals, employers and the government – all must contribute to the cost of improving our health care system.”

John Firehammer, spokesman for Montana Change That Works, says the bill’s combination of tax credits for small businesses, subsidies for some families and a reduction in “cost-shifting” of health costs will end up lowering overall costs for most.

“And reform will cut the (federal) deficit,” he added. “Put that together, and reform will have a strong effect in cutting, not raising, the net tax load.”

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