Typically, we estimate taxes over 10 years. Contrary to the claims of Republicans such as House Majority Leader Eric Canto (Va.), who says the Affordable Care Act has “six years of benefits with 10 years of tax increases,” most of the law’s tax increases don’t kick in until the latter part of the decade. So a 10-year budget window can be misleading in the case of the Affordable Care Act.
Fortunately, in its 2010 Long-Term Budget Outlook, the Congressional Budget Office resolved this problem, estimating the size of the Affordable Care Act’s tax increase in the year 2020, by which point all the taxes will be fully in effect. So how big is it? One half of one percent of GDP. That’s about the size of Bill Clinton’s 1993 tax increase or George Bush’s 1991 tax increase, and much smaller than Ronald Reagan’s 1982 tax increase.
Still, it’s a big tax increase. The money, though, is not coming from the source that many suspect -- or even from one that Republicans necessarily oppose.
This conversation kicked up because the Supreme Court ruled the individual mandate a tax rather than a penalty and Republicans saw a political opening. But whatever you think of the mandate, it’s not a big contributor to the law’s new taxes. In 2019, the Affordable Care Act is expected to bring the federal government $104 billion in new revenue. The individual mandate accounts for about $7 billion of that. It’s not a rounding error, but it’s close.
So where does the money come from? The law’s biggest tax increase, at least in the first decade, is a 0.9 percent increase in the Medicare payroll tax paid by Americans earning more than $200,000 a year. Long-term, however, the largest increase -- and certainly the most important one for the future of the health-care system -- will be the excise tax on high-value health insurance plans, which begins in 2018.
Few phrases in the English language send readers fleeing as quickly as “excise tax on high-value health insurance plans.” So I’ll try to explain this as quickly and painlessly as possible. It’s a tax on unusually expensive, employer-provided health insurance plans. It begins at $10,200 for an individual plan and $27,500 for a family plan. Above that, there’s a 40 percent tax on the excess premiums. So if your plan is valued at $11,200, your employer will pay a 40 percent tax on the $1,000 surplus.
Over time, the thresholds will rise more slowly than health-care costs, which means the tax grows bigger. But the idea behind the tax isn’t to raise money: It’s to change behavior. The hope is that it will pressure employers and workers to choose less-expensive plans. If it works, additional tax revenue will be generated less by so-called “Cadillac” plans subject to the excise tax than by employers delivering more of their workers’ compensation in the form of taxable wages and less in the form of expensive health-care benefits.
This is actually an attempt to address a core Republican concern: The tax break for employer-provided health insurance, which Republicans believe encourages employers to spend too much on health care while also making it impossible for a health-care system not based on employers to emerge.
Don’t believe me when I say that’s high on the Republican agenda? In 2007, President George W. Bush announced the only major health-care initiative of his eight years in office other than the 2003 Medicare prescription drug bill. The policy, which went nowhere, sought to “level the playing field for those who do not get health insurance through their job” by ending the unlimited tax break for employer-based insurance in favor of a $15,000 tax deduction for families and a $7,500 tax deduction for individuals to purchase health insurance.
In 2008, Republican presidential candidate John McCain offered a similar plan: He proposed ending the unlimited employer deduction and instead giving every family a $5,000 tax credit and every individual a $2,500 tax credit.
This year, Republican presidential candidate Mitt Romney’s health-care proposal -- although it’s so vague it hardly merits the term -- gestures toward the same idea: His Web site says he will “end tax discrimination against the individual purchase of insurance.”
All of these proposals, including the Affordable Care Act’s excise tax, work in fundamentally the same way, by imposing limits on what is now an unlimited deduction for employer-provided health insurance, thereby encouraging employers to offer cheaper health plans and provide more compensation to workers in the form of taxable wages.
So when Republicans call the Affordable Care Act “the largest tax increase in the history of the world,” they’re not only wrongly supersizing the tax, they’re also attacking a reform that they’ve long supported themselves, in somewhat different configurations.
But President Obama’s campaign deserves the cheap shot. When McCain proposed his health-care plan in 2008, the Obama camp called it, yes, “the largest middle-class tax increase in history.”