Health care plan could hit wealthy with big tax hikes

By The Associated Press Comments 0
Published: November 3, 2009

WASHINGTON — The typical family would be spared higher taxes from the House Democratic plan to overhaul health care, and their low-income neighbors could come out ahead.

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Their wealthy counterparts, however, face big tax increases that could eventually hit future generations of taxpayers who are less wealthy.

The bill is funded largely from a 5.4 percent tax on individuals making more than $500,000 a year and couples making more than $1 million, starting in 2011. The tax increase would hit only 0.3 percent of tax filers, raising $460.5 billion over the next 10 years, according to congressional estimates.

But unlike other income tax rates, the new tax would not be indexed for inflation. As incomes rise over time because of inflation, more families — and more small business owners — would be hit by the tax.

In 2011, a family of four with an income of $800,000 a year would get a $24,000 tax increase, when the new tax is combined with an increase in the top two tax brackets proposed by President Barack Obama and other scheduled tax changes, according to an analysis by Deloitte Tax. That’s a 12.5 percent increase in federal income taxes.

"These are very big numbers and very high effective tax rates,” said Clint Stretch, a tax policy expert at Deloitte Tax.

The new health care tax would come on top of other tax increases for the wealthy proposed by Obama. The top marginal income tax rate now is 35 percent, on income above $372,950. Obama wants to boost the top rate to 39.6 percent in 2011 by allowing some of the tax cuts enacted under former President George W. Bush to expire.

House Democrats said they are proud that they found a way to finance the health care package largely from a tax on the wealthy. There is, however, little appetite for a millionaire’s tax in the Senate, where some hope to eventually use tax increases on the wealthy to help close the growing federal budget deficit.

"If health care is a benefit that is worth having, then it’s worth paying for,” said William Gale, who was an adviser to President George H. W. Bush’s Council of Economic Advisers and is now co-director of the Tax Policy Center.

"This gives the impression that it’s only worth having if someone else pays for it,” Gale said.

Under the bill, individuals are required to obtain health insurance coverage or pay penalties, which are described as taxes in the legislation.

The penalty would be equal to the cost of an average insurance plan or a 2.5 percent tax on incomes above the standard threshold for filing a tax return, whichever is less.

To help afford insurance, families with incomes up to four times the federal poverty level would qualify for subsidies. The poverty level for a family of four is $22,050 this year.