Major tax increases in the Reid health care bill

The following is from the Joint Tax Committee estimate of the revenue effects of the Reid bill. I have listed provisions with major revenue effects (+$20 B / 10 years) and a few others that have significant policy or political impacts. There are some smaller changes as well, which you can see for yourself in the 3-page document. All revenue figures are revenues raised over the ten-year period 2010-2019.

  1. 40% excise tax on health coverage in excess of $8,500 (individuals) / $23,000 (families). Amounts are indexed for inflation by CPI-U + 1% … begins in 2013 … $149 B tax increase
  2. Additional 0.5% Medicare (Hospital Insurance) tax on wages in excess of $200,000 ($250,000 for joint filers) … begins in 2013 – $54 B tax increase
  3. Impose annual fee on manufacturers and importers of branded drugs … begins in 2009 … $22 B tax increase
  4. Impose annual fee on manufacturers and importers of certain medical devices … begins in 2009 … $19 B tax increase
  5. Impose annual fee on manufacturers and importers of health insurance plans … begins in 2009 … $60 B tax increase
  6. Cut in half (to $500K) the amount of an executive’s compensation that a health plan can deduct from its corporate income taxes … begins in 2013 – $600 million tax increase
  7. Impose 5% excise tax on cosmetic surgery and similar procedures … begins for surgery in 2010 … $6 B tax increase!

In total the bill would raise taxes by $370 B over ten years.

Here’s some reaction to these provisions. Updates since Wednesday night are in green.

Excise tax on high-cost plans (section 9001, beginning on page 1979)

It appears Leader Reid did, as rumored, raise slightly the limits in the Kerry excise tax on high cost plans, exempting some slightly more expensive health plans from taxation. It appears he substituted (2), the new Medicare payroll tax increase to cover the lost revenue.

The amounts in (1), relative to the Finance Committee, look like the result of an aggregate constraint from the unions. The Baucus / Finance Committee bill had limits of $8K / $21K and raised $201 B. The Reid limits of $8.5K / $21K are only slightly different, but raise $149 B. It looks like someone said “Get the Kerry tax number down from $200 B to under $150 B.”

From my perspective, this is crazy. Reid and Senate Democrats now have to defend themselves on two major tax increase policies rather than one. If you’re going to take the political hit for the Kerry tax on high cost plans, you might as well squeeze as much revenue as possible out of it. I assume he did this because someone forced him by threatening to oppose the bill (unions? one or more Senators?).

Medicare payroll tax increase (section 9015, beginning on page 2040)

Wow. It’s incredible that a Democratic leader would propose this.

Current law:

  • Wages up to $106,800 in 2009 (and in 2010) are subject to payroll taxes of 15.3%: 12.4% Social Security + 2.9% Medicare.
  • Wages above $106,800 are subject to payroll taxes of 2.9%.

My reading of section 9014 of the bill tells me that Leader Reid proposes the following addition (changes in red):

  • For individuals, wages between $106,800 and $200,000 for individuals are subject to payroll taxes of 2.9%.
  • For individuals, wages above $200,000 are subject to payroll taxes of 3.4%. That’s a 0.5 percentage point tax increase. So for each $1K you make above $200K, you would pay $5 more in payroll taxes.
  • For joint filers, wages between $106,800 and $250,000 for individuals are subject to payroll taxes of 2.9%.
  • For individuals, wages above $250,000 are subject to payroll taxes of 3.4%. That’s a 0.5 percentage point tax increase. So for each $1K you make above $250K, you would pay $5 more in payroll taxes.
  • These threshold amounts of $200K and $250K are not indexed for inflation or wages, so more real income in each subsequent year will be subject to the 0.5 percentage point tax increase.
  • The additional 0.5 percentage point tax increase comes on the employee side, so you still pay income taxes on these additional amounts of taxes paid.

With this proposal, Senator Reid is leading Democrats across a major philosophical threshold. Since Social Security was created in the 30’s and Medicare in 1965, payroll tax revenues have been “dedicated” to financing these programs. While not all funding to finance Medicare comes from payroll taxes, all funding from the Medicare payroll tax finances Medicare. In other words, the 2.9% Hospital Insurance payroll tax that you and your employer pay on your wages is all supposed to offset Medicare spending. That is part of the social insurance model, in which everyone pays in a fraction of their wages, and everyone receives benefits later.

I am not a fan of the social insurance model, because it is non-transparent: most people think their individual taxes paid are being used to finance their benefits, when in fact the funds are used to subsidize other people’s benefits. But the social insurance model and dedicated payroll taxes have been a core principle of Social Security and Medicare financing since they were created, and advocates (especially on the Left) of those programs have fiercely defended this principle.

Leader Reid’s bill would use new Medicare payroll taxes to finance a new health entitlement outside of Medicare. His bill would turn Medicare payroll taxes into a general financing mechanism like the income tax. There is a slippery-slope argument against this that I would normally expect from the Left. If Republicans (or my former boss) had proposed this, I would expect AARP to come unglued and raise fears among seniors that, if this proposal becomes law, future Congresses might take payroll tax revenues and use them for highways or defense or other non-social insurance spending. I am interested to see how AARP reacts. Will they support the Reid bill as they did the House bill? (Reporters: There’s a story for you. Ask AARP.)

In addition, Social Security and Medicare payroll taxes have always worked from the bottom of the wage scale upward, because they are traditionally tied to benefit eligibility. Leader Reid is now creating a “donut hole” in which there are three rate “brackets.” This initiates and lays the groundwork for the future expansion of a progressive tax rate structure for payroll taxes. This makes it easier for future lawmakers to raise payroll taxes to finance other parts of government, because they’re just “taxing the rich.” While the Reid proposal applies only to wages at the top of the distribution, the principle would be in place to justify raising payroll taxes in that $106K – $200K in the future. Watch out.

Both of these are enormous precedents, long-term structural game changers in how we finance our government.

The non-indexing for inflation raises an interesting question about whether it breaks President Obama’s pledge. Was his $250K limit in real or nominal dollars?

This provision is a big risk for moderate Senate Democrats.

Tax experts – it looks like they’re doing something tricky by using “taxpayer” rather than “individual” as in section 3101(b) of the I.R.C. I invite further explanation if this is significant.

Taxes on branded drugs, medical devices, and health plans (section 9008 on page 2010, section 9009 on page 2020, and section 9010 on page 2026)

The drug tax is a tax on “Big Pharma.” Bigger drug companies would pay higher taxes. For instance, a branded drug company with sales of $5M – $125M would pay taxes on only 10% of its gross sales, while one with >$400 M of sales would pay taxes based on 100% of its gross sales. (See p. 2012 of the bill.)

It is also applied only to brand name drugs, not generics. I would like to hear the policy rationale for this. The political rationale is simple: shaft the big brand-name Pharma companies. With exceptions, brand-name drug companies generally lean R, generic drug companies generally lean D.

In each case, I expect the providers will pass most of the tax increase on to consumers in the form of higher prices.

There are also a bunch of reporting requirements that at first glance look as if they are laying the intellectual groundwork for the future imposition of price controls. I invite further explanation from someone with expertise in drug pricing and rebates.

I know of no legitimate policy rationale for any of these taxes. They are derived from the following logic:

  • If the government spends more on health insurance, these two industries would make more money.
  • The government needs tax revenues.
  • So we’ll tax these industries to capture some of their increased revenues.

Shafting the health plan executives (section 9014 on page 2035)

I’m torn between hating the policy and chuckling at the political naivete of leaders of the health insurance industry. Unlike the taxes on big Pharma and medical device firms, here Leader Reid is going after the health plan executives’ individual compensation. He’s making it more expensive for a health plan to pay its executives more than $500K. Note that the higher taxes would apply to income earned paid in 2013 or later, even if that income was earned as early as 2010.

It’s terrible policy to single out the compensation of any particular industry. Wall Street: if this becomes law, you’re next in the crosshairs.

This is gratuitous political punishment of an unpopular constituency. The section is titled “Limitation on excessive remuneration paid by certain health insurance providers.” It raises $600 M over 10 years, and is thus insignificant as a pay-for.

How’s that political alliance working out for you guys?

Rather than trying to repeal this section, I’ll bet some creative Republican Senator offers an amendment to extend it to trial attorneys involved in medical malpractice cases.

Cosmetic surgery tax (section 9017 on page 2045)

The federal government would impose a 5% sales tax on cosmetic surgery. Late-night comedians will love this.

I can’t think of another case where the Feds would impose a sales tax. Governors and Mayors usually regard sales taxes as “their turf.” I wonder if they’ll fight this.

Update: Best guess is that it does not apply to braces, but would apply to teeth whitening.

Joint Tax estimates this new tax would raise $5.8 B over ten years. That’s a lot of cosmetic surgery.

This tax would violate the President’s pledge not to raise taxes on those with annual income below $250K.

It would apply to surgery performed beginning in 2010, so get your work done before the new year.

39 thoughts on “Major tax increases in the Reid health care bill

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  2. Walter Sobchak

    As I said earlier, the tax on face lifts will make those Hollywood types regret supporting Obama.

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  6. Steven Hales


    We all know that deficit spending has contributed to a growing percentage of economic growth over the past two decades any forced reduction in deficit spending without economic growth picking up the slack will cause aggregate demand to fall. The problem as I see it is that we would be better off over the course of reform of the healthcare sector if the additional spending increased the budget deficit. By imposing new taxes as the economy naturally recovers will depress aggregate demand for all other goods and services ex-healthcare and will dampen economic recovery. I am not in favor of an entrenched budget deficit driven by unfunded mandates but I am concerned that focusing on the budget deficit will cause economic distrotions as we try to spend more on healthcare at a time when the prospects for economic growth are so dim.

  7. Heartless Libertarian

    Can’t think of a federal ‘sales tax?’

    How about the 11% excise tax on firearms?

  8. John Alexander Thacker

    Isn't charging a different payroll tax for joint filers a pretty new and complex step? Currently the "employee portion" of OASDI and Medicare is all calculated by employers and taken out in the paycheck. Since it's the same for everyone, it's easy for employers to withhold the correct amount, and people don't have to think about it when filing. Now people are going to have an extra line in their taxes, changing their calculations and having to pay extra (or less) Medicare tax from what was withheld depending on their filing status.

    Also, I think you have some typos when you meant to say "For joint filers" but said "For individuals."

  9. MarkJ

    Any residual notion that Harry Reid hasn't gone totally ga-ga, and needs to be led off by nice young men in white coats, should be dispelled by this health care bill.

  10. Tim McD

    Holy Cow, did Reid really propose a Tit Tax? He must not be planning on running for reelection in NEVADA! ROFL!

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  12. MikeL

    “I’ll bet some creative Republican Senator offers an amendment to extend it to trial attorneys involved in medical malpractice cases.”

    That’s the answer to tort reform! Don’t limit the award to the plaintiff (or as Democrats say, “victim”), just limit how much the lawyers can get. They’ll quickly lose interest and sue some other industry.

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  15. Maury

    Reid, Pelosi et al should be jailed for robbery, if any form of this bill passes.

    Holder and Obama should be held as traitors to America for the KSM trial move (and other actions, but it's the "cherry on the cake". Or straw that broke the Democrat Ass's back)

    The entire Dem thuggocracy, and any RINO's, should be deported and exiled, to North Korea, where they can enjoy the fruits of socialist hell.

    it's ENOUGH, we have had ENOUGH.

    None of these folks give a damn about the PEOPLE. They are not representing us, they are just thorough thugs and robbers and traitors.

    It gets clearer every day.

    Am I a bit shrill and crazy-sounding?

    Yes, I sound shrill, but am I crazy? 2000 page bills that no one reads? Moving terrorists to a Federal civilian court so they can have a field day against America? Obama's forcing the Senate to ignore the Ft. Hood investigation? Obama's apology tour? Taxation that will bring about the utter destruction of the economy, as has the stimulus, cap-and-trade if they can push it through, HOW MANY OTHER EXAMPLES DO WE NEED OF THE PERFIDY OF THIS ADMINISTRATION?

    I know I'm not addressing the direct point of these obscene taxes, but I've had enough. I'm a physician, I work in an emergency room; I am an hourly worker, get paid decently (i.e. about a 1/3rd of a billable hour of attorneys fees!), and I see the injustice in the system every day. Nevertheless, I also see the abuse, the waste, the insanity that goes on, and will ONLY GET WORSE UNDER WHAT IS BEING PROPOSED. If you work for a living, you will GET SCREWED. It will not pay, literally, to work. It'll be better to go on the dole and get what you need for "free".

    DAMN IT, I"VE HAD IT. I don't advocate violence, but we need to do more than palaver about the niceties of what's wrong. We KNOW what's wrong. We have thieves running our country. Marxist thieves.

  16. Frankly5

    Just as a matter of interest, Perrigo Corp. is the world's largest maker of OTC private label drugs and a big chunk of generics and their leadership couldn't be more Republican oriented.

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  19. Think38

    Section 3101(b) currently works on an individual basis. The current tax code contains no provision for applying payroll taxes on a family or combined filer basis. This is new territory that will make compliance more complex.

  20. Karen

    I’m with Maury.

    What does this bill do for me and my family? Nothing but tax us further. I have compassion and want all people to have health care but I have enough on my plate taking care of my own family without adding the rest of the USA onto my back. ENOUGH. WE ARE SICK OF BEING ROBBED BY THESE TRAITORS!

    1. Elizabeth

      I totally agree. I am a single parent and work full-time and go to school part-time (Masters) just to compete with everyone. I don't need anymore on my plate.

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