Health Care Reform Likely to Include More Taxes for Many Americans

Despite Vow from Obama, Middle-Class Americans Could See Higher Taxes


Nov. 16, 2009—

As a presidential candidate, Barack Obama had one central message to middle-income Americans: no new taxes. And since taking office, the president has repeatedly pledged not to raise taxes on families making less than $250,000 a year.

But as a massive health care reform bill inches closer to reality, middle-class Americans, as well as high income earners, can expect some sort of increase in what they pay into government coffers, say Republican critics and some fiscal watch dog groups.

The Senate Finance Committee health care reform bill, which could hit the Senate floor as early as this week, would impose new taxes on insurance companies, drugmakers and medical device manufacturers.

It would also impose a 40 percent tax on the portion of insurance premiums exceeding $8,000 a year for individuals and $21,000 a year for family plans. That tax would be imposed on insurance companies, though it would likely be passed on to consumers, including many middle-income families, say experts.

Last week, Senate Majority Leader Harry Reid was considering a proposal to increase the Medicare payroll tax on high-income workers to help offset the costs of providing health insurance to millions of Americans.

But several Democratic senators are urging Reid to propose extending the Medicare payroll tax to income other than wages, such as capital gains, dividends and rental income. Democrats say that could generate revenue from wealthy households who often get a greater share of their income from sources other than wages.

Some Republicans and Wall Street investors say tapping into high-end earners and capital gains will soak the rich and hurt an already ailing economy.

"Could there be a more efficient way to kill our halting recovery from recession than to have Harry Reid plot in secret to raise taxes?" says Donald Luskin, chief investment officer at Trend Macrolytics LLC. "Have we learned no economic lessons from the Depression?"

The recently passed House bill would impose a 5.4 percent income tax on individuals making more than $500,000 and joint filers making more than $1 million.

The top income tax rate is 35 percent. If existing Bush-era tax cuts expire in 2011, as President Obama has called for, the top rate would grow to 39.6 percent. The new health care tax would further increase that to 45 percent. The House bill would also impose a 2.5 percent tax on the sale of medical devices.

Paying a Fair Share

The House bill would raise $460 billion over the next decade from new income taxes that mostly target the wealthy.

"The public pretty much thinks the richer people in America ought to pay their fair share," says House Majority Leader Steny Hoyer told ABC News last week. "They don't think they're paying their fair share."

But Democratic Sen. Ben Nelson of Nebraska says he'll vote to block any health care bill that looks like the bill passed by the House. "The costs are extraordinary associated with it," he told ABC News. "It increases taxes in a way that will not pass in the Senate. I won't vote to move it."

The House GOP bill, which was rejected a week ago, had no new taxes. Republicans would get savings by capping medical liability awards, stepping up efforts to fight Medicare and Medicaid fraud, and setting up an approval process for generic versions of high-tech drugs.

All of the health care packages are expensive. The House bill is projected to cost $1.2 trillion over 10 years and the Senate Finance Committee bill is projected to cost $829 billion. Taxes will increase if any of the plans are enacted, say experts.

According to a report by the Tax Foundation, a tax research group based in Washington, D.C., wealthy taxpayers in 39 states could pay a top tax rate higher than 50 percent by 2011.

The report combined states' average local tax rates, top state and federal rates with the 2.9 percent Medicare tax and the proposed 5.4 percent health surtax.

Also possibly adding to middle-class tax burdens is a provision in the House plan that requires all Americans to have health insurance.

Large companies would have to offer coverage to their employees, and both consumers and companies would be slapped with penalties if they defy the government's mandate.

"If you choose not to get insurance, you get hit with an excise tax," says Luskin of Trend Macrolytics LLC. "Which is a fancy way of saying a fine or a penalty."

For low-income Americans, the bill would provide subsidies for buying insurance if they don't receive it through an employer. It would also create a federally regulated insurance exchange where individual Americans could shop for coverage.

"There are harmful taxes and taxes that aren't as harmful," says Gerald Prante, a senior economist at the Tax Foundation. Prante says ultimately the final health reform bill will raise taxes on the general public.

"Taxes are necessary evil to finance governments."