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The Affordable Care Act (ACA) has a lot to do with tax policy, and the new taxes it created are starting to add up. A 2.3 percent medical device excise tax will raise $1.7 billion in revenues this year, while the new unearned income Medicare contribution tax on high-income savers will raise $20.5 billion. A tax on pharmaceuticals that took effect in 2011 will also raise $2.9 billion this year.
One of the next ACA taxes scheduled to take effect is a health insurance tax that will hit small businesses and their employees particularly hard. The tax is officially imposed on health insurance companies, but the greatest effect will be felt by their customers because the insurance companies will pass most of the burden on through higher premiums. An analysis by the nonpartisan Joint Committee on Taxation found that the tax will raise insurance premiums on average by $350-$400 per affected family in 2016.
The higher premiums caused by the new tax will also prompt some employers to self-insure rather than purchase true insurance for their workers. The tax exempts employers who self-insure, as well as certain nonprofit insurers who provide more than 80 percent of their services to Medicare, Medicaid, CHIP, or dual-eligible plans.
Normally, when some taxpayers change their behavior and avoid a tax, the tax raises less revenue than might otherwise be expected. Oddly, the insurance tax is designed in a way that prevents any revenue decline. The ACA presets the insurance tax’s total revenue yield at $8 billion next year, rising to $14.3 billion by 2018. To make this possible, each year’s tax is calculated in the following year, with the preset total tax burden allocated among insurance companies based on each company’s share of the market.
If insurance companies raise premiums to cover the tax and some employers respond by self-insuring, the result will be a bigger tax on the employers that remain in the insurance market. Of course, the bigger tax would fuel another round of premium hikes, causing more employers to self-insure, further premium increases, and so on.
According to the Kaiser Family Foundation’s 2012 Survey of Employer Health Benefits, 15 percent of the smallest employers self-insure, roughly half of employers with 200-999 workers self-insure, and 93 percent of firms with more than 5,000 workers do so. Because the smallest employers almost never self-insure, they will end up bearing the brunt of the tax. Midsized firms will be most likely to shift to self-insuring their workers.
Congress and the public may not view insurance companies as sympathetic figures. But it’s the insurance companies’ customers who will be most penalized by this new tax, whether through $400 premium increases or by being forced to run the risks of self-insuring.
Democrats’ reluctance to unwind any of President Obama’s signature health care bill makes repeal of the insurance tax an uphill battle. But efforts are already underway by key Republicans. Senator Rob Portman, newly appointed to the Finance Committee, recently introduced S. 24, the Small Business Health Relief Act, which would repeal the insurance tax and other new taxes from the ACA. House Ways and Means Committee Member Charles Boustany’s insurance tax repeal bill garnered 226 cosponsors last Congress.
Much like the medical device tax and the pharmaceutical tax, this tax is an ill-designed policy that will distort the industry and raise costs for consumers. Regardless of what happens to health care reform more broadly, the insurance tax should go. Democrats, given their constant concern about the progressivity of the tax code, should join in the fight to repeal a tax that boosts costs for small businesses and their workers. And all lawmakers, regardless of party, should be concerned about how this bill will cause distortions across the marketplace.
Alex Brill is a research fellow at the American Enterprise Institute. He previously served as chief economist and policy director at the House Ways and Means Committee.
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