No matter how the “fiscal cliff” negotiations end, there’s one thing that’s for sure: Come 2013, the country will face new taxes.
That’s due to the Affordable Care Act, which has three new tax provisions that take effect at the end of 2012. Taken together, they’re expected to raise $245.4 billion in revenue by 2019 (the most recent budget window for which data is available) and help pay for the 33 million Americans expected to gain coverage under the health law. Here’s how they break down, with numbers courtesy of the Joint Committee on Taxation.
Let’s start with the biggest revenue generator: New Medicare taxes. Employers already take out 7.65 percent of workers’ wages to support the elderly and disabled. Of that, 1.45 percent goes toward paying Medicare’s hospital bills.
The Affordable Care Act increases the Medicare hospital tax by 0.9 percent, beginning in 2013, for anyone who earns more than $200,000 ($250,000 for joint filers). It also creates a new, 3.8 percent tax on investment income, setting income thresholds at the same $200,000 and $250,000 levels mentioned above.
It sounds like a decidedly dull and familiar provision: We already pay, after all, a hospital insurance tax. John McDonough, a former health policy adviser to the late-Sen. Ted Kennedy, argues that it’s actually a really transformational way in how we pay for the Medicare program.
“It represents a major shift in federal tax policy–for the first time, unearned income will be subject to Medicare taxes, albeit less than for earned income,” he writes in Inside National Health Reform. “For progressives, this is an enormous and positive breakthrough in tax policy.”
He also notes that it has had an immediate impact on Medicare projections, too, as the new tax was a “significant factor” in the Medicare trustees conclusion that the Affordable Care Act extended the Medicare Hospital Insurance Trust Fund from 2017 to 2029.
The Medicare taxes may raise the most revenue, but it’s the medical device tax that has garnered the most attention here in Washington. That provision levies a 2.3 percent tax on the sale price of a medical device, to be paid by the manufacturer.
What counts as a medical device? Think of the various gadgets in your doctors’ office, everything from gloves to defibrillators to the pacemakers inserted into patients. Things that consumers tend to purchase — glasses, hearing aids and contact lenses — are not subject to the provision.
The medical device tax doesn’t necessarily single out device makers: Drug manufacturers and health insurers will also face similar fees, all part of the plan to finance an insurance expansion meant to cover 33 million Americans. This provision in particular is expected to raise $20 billion over the next decade.
Still, the Medical Device Tax has come under siege on both sides of the aisle: Repeal legislation passed the House easily this past summer, with 37 Democrats joining Republicans in support. Seventeen Democratic senators recently fired off a letter to Health and Human Services asking for a one-year delay on the provision. Ten days out from implementation, however, the medical device tax doesn’t seem to be heading anywhere.
Last but not least, we have the smallest revenue raiser, which changes who can deduct medical expenses in their tax filings. Up until now, anyone who spent more than 7.5 percent of their adjusted gross income on health care could claim that amount as a deduction; spend 7.4 percent, however, and you’re out of luck.
That threshold will rise to 10 percent on Jan. 1. Some do get an exemption: Anyone who will turn 65 within the next four years can still use the 7.5 percent threshold through 2017.
