Income and payroll taxes: The President’s plan follows the Senate’s lead, and includes a 0.9 percent Medicare payroll tax on income over $250,000 for families, and $200,000 for individuals. Each of us pay this tax already, it’s the deduction on your paycheck under the heading "medicare tax." The proposal would increase this tax for these high earners from 1.45 percent to 2.55 percent, but only on the amount of income over the $200,000 or $250,000 threshold. So a family bringing in $300,000 a year, would pay roughly $450 more a year in Medicare taxes—about 0.15 percent of their income, or less than two tenths of a percent.
The president’s plan also includes a new tax on what’s called "unearned income." Right now income from things like interest earned, dividends, annuities, royalties, and rents is usually not subject to Medicare taxes. The President’s proposal would make these sources of income subject to a 2.9 percent tax, but only for single taxpayers earning more than $200,000 alone, or joint filers earning more $250,000.
The Obama proposal eliminates the House plan to pay for reform primarily from a 5.4 percent tax surcharge on income over $500,000 a year for individuals, and $1 million for couples—the so-called millionaire’s tax.
Excise tax on high cost plans: The primary revenue component of the Senate and White House plans is a tax on expensive health care plans, sometimes referred to as "Cadillac plans." Most Americans get their insurance through their employers, which pay on average about 83 percent of the premiums, and somewhat less than that for family coverage. You likely don’t even know how much that portion is, but it’s part of your compensation and it’s protected from income tax. The rest of your premium is usually deducted from your paycheck.
The President’s proposal delays implementation of the tax and increases the threshold for plans to qualify for it. Under this proposal, the tax wouldn’t take effect until 2018 and would apply only to plans with a total cost that exceeds $27,500 for a family or $10,200 for individuals (not counting vision and dental coverage). (For comparison’s sake, in 2009 the average health insurance premium was $13,400 for a family and about $4,800 for an individual.)
The 40 percent tax would apply only to the portion of the premium above the tax threshold, and it would be paid by the insurers. So, after 2018, if you have a family plan that costs $30,000 a year, your insurer would pay a tax totaling 40 percent of the $2,500 beyond the threshold, roughly $1,000 per year. At least some of that expense would likely be passed on to you and your employer.
While the term "Cadillac plan" suggests that expensive plans are luxuries, that’s not always the case. A plan may be more expensive because employees live in a part of the country with high health costs, or are older and more expensive to insure, or have inherently dangerous jobs such as firefighting or construction work. That’s why the proposal would raise the "Cadillac tax" threshold another $1,850 for these categories of workers.
It’s estimated that few families and individuals will have plans that would be taxed when it first takes effect in 2018. But the number who do qualify could grow over time because the cost of health care has been rising faster than general inflation. If the cost of health care slows, fewer insurance plans would be taxed.
And that is ultimately the idea behind the tax. One of the problems with our current health care system is that the uninsured and underinsured get too little care, while those who are fully covered sometimes get more care than they need—and sometimes more than what is good for them. The excise tax would encourage employers to provide coverage designed to encourage more cost-effective treatments, which would help ease the rising cost of care.
As employers cut back on expensive plans to avoid the excise tax, they’d transfer that part of your salary to wages. That means a bigger paycheck, on which, unlike the employer contribution to your health insurance, you pay income tax. That’s by design, and it’s largely how the Senate and White House plans would pay for health reform. The excise tax would raise only a small portion of its revenue by actually taxing benefits, and a much greater share as employers transfer compensation from nontaxable benefits to taxable wages.
Other taxes: There are a few other taxes included in the benefit that don’t directly apply to consumers, but may be passed on to you in the form of slightly higher prices.
Over the next decade, the plan would charge drug companies $33 billion in fees, and device makers about $20 billion in excise taxes to help pay for the extra business they’ll pick up selling their products to 30 million newly-insured Americans. Health insurers also stand to gain millions of new customers as a result of reform. Obama’s proposal would raise revenues from these companies to the tune of about $67 billion over ten years.
Finally, if you frequent tanning salons, you’ll pay a new 10 percent tax for exposing yourself to the risk of skin cancer.
—Kevin McCarthy, associate editor