President Obama has proposed a nearly $1 trillion compromise plan as he tries to resuscitate his sagging health-care reform initiative. Law professor Richard L. Kaplan, an expert on elder and tax law, analyzes some of the tax implications in an interview with News Bureau Business & Law Editor Jan Dennis.
President Obama recently restarted his health-care initiative with a revised proposal that makes major tax changes. Briefly, what is now being considered?
There are basically two major developments. First, President Obama has endorsed the Senate bill's 40 percent tax on premiums of certain high-value or so-called "Cadillac" health insurance plans. And two, he would expand the reach of the Medicare tax on individuals with annual incomes of more than $200,000, and married couples with annual incomes of more than $250,000.
Didn't Obama, when he was a U.S. senator campaigning for the presidency, oppose a tax on high-value health insurance plans?
That is correct. In fact, the Obama campaign devoted 17 percent of its entire television budget to ads that explicitly promised not to tax health insurance benefits, as Sen. John McCain had proposed. The president's new proposal does, however, limit the impact of this tax to plans with an annual premium of at least $10,200 for individuals and $27,500 for family coverage. Furthermore, he proposes certain upward adjustments to those thresholds for employers whose plans are expensive because of the age of their employees. Finally, the effective date of the tax is now delayed until the year 2018. As a result, many fewer employees will be affected by this tax, at least for now.
If that's the case, how does the overall health-reform plan make up the lost revenue?
That is where the expanded Medicare tax comes into play. It raises the tax rate from the current 1.45 percent to 2.35 percent on all wages, salaries, and self-employment income above the $200,000/$250,000 threshold mentioned previously. In addition, these same people will now owe a 2.9 percent tax on their non-wage income, such as interest, dividends, annuities, royalties, and rents.
Is the idea of imposing the Medicare tax on non-wage income new?
Yes it is. Since the inception of Medicare in 1965, it has been financed primarily by a tax on earned income, collected on employees by means of payroll withholding administered by their employers. On the other hand, Medicare Part B has always had substantial financing from general income-tax revenues, which include taxes collected on all types of income, but there was never any explicit breakout for this program. Moreover, high-income retirees have been required since 2007 to pay additional premiums for their Part B coverage based on their income from all sources, including investment income. I examined that significant development in my article "Means-Testing Medicare: Retiree Pain for Little Governmental Gain."
Are the thresholds at which these changes take effect somewhat disproportionate?
Any time the threshold for married couples is less than twice the threshold for single individuals, there is a disproportionate impact on married couples, generally called a "marriage tax penalty." So if individuals earning $200,000 are thought to be the appropriate tax target, then the threshold for married couples should be $400,000 to avoid creating yet another marriage tax penalty. On the other hand, throughout the election campaign of 2008, Mr. Obama employed the $200,000/$250,000 threshold when promising that only persons above that threshold would see their taxes raised. So, in this regard at least, he is being consistent with the rhetoric he used during the campaign.
How will Medicare's new tax on non-wage income be coordinated with the increased payroll tax that employers handle?
That is not clear. Certainly, employers will not be able to handle the administrative burden of collecting the tax on non-wage income because they do not have access to their employees' investment information. As a result, the Medicare tax on non-wage income will probably need to be collected through the income tax return process. One aspect is clear, however: Tax simplification this is not!