Health Reform's Taxes: "Zero" Chance of Not Changing

Health care reform is expensive, and the Democrats wanted to draw up a revenue-raising plan that would make it deficit neutral -- or even deficit-slashing in the long term. So the bill raises taxes. Starting in 2018, there is a new 40 percent excise tax on expensive insurance plans. In 2013, health reform will also raise special taxes for households earning more than $250,000: Medicare payroll taxes will go up by 0.9 percentage points and investment taxes (capital gains) go up by 3.8 percentage points. That last tax is expected to generate more than $30 billion per year by 2019, according the Joint Committee on Taxation.

TaxVox blogger Howard Gleckman is worried that some of these taxes might not last until the end of the decade. The United States is seriously overdue for comprehensive tax reform. We haven't had a major spring cleaning of the tax system since 1986 and in the last quarter century, unruly deductions, exemptions and carve outs have sprouted like weeds in the tax code. Any comprehensive reform plan will likely touch all parts of the tax system: it will eliminate wasteful deductions, alter tax brackets, pick up a national consumption tax and tinker with corporate income and investment taxes. That last part is key, because there's a decent chance that comprehensive tax reform will overrule some taxes created to pay for health reform.

Tuesday afternoon Gleckman told me: "The first step of this is to keep in mind that the two big tax increases to pay for health care don't take effect for many years. So there is a very good chance given the fiscal situation that there will be significant tax reform certainly by 2018. So what that does is it throws all the current tax system including the Cadillac tax and the Medicare tax and the investment tax into the mix. And there's no way to know what's going to come out the other end."

Gleckman says the tax in the most danger is the investment tax. If comprehensive tax reform slashes capital gains taxes in exchange for a broad based consumption tax like a VAT, which is entirely in the realm of possibility, it will overrule that investment surtax.

This doesn't mean that health care reform is doomed. Taxes will still come in to pay off the subsidies -- perhaps even more than today. Revenues get mixed up in one big pot, and if you raise taxes, the revenue pot gets bigger. Gleckman observes, "The big point here really is not to try to guess which taxes will be enacted and overruled. It's just to say when you pass a tax increase that doesn't take place in ten years, a lot can happen. The chances of this tax plan going into effect as passed is about zero."


"Yes, zero. In ten years, something is going to happen that changes this proposal."