By Grace-Marie Turner
So just how much is that new ObamaCare tax going to cost you? For some people, a lot more than you have been hearing.
The individual mandate section of the health overhaul law outlines the structure of the “taxes” that must be paid by those who don’t buy government-approved health insurance – starting at $95 a year the first year for individuals. Many people are thinking it will be much cheaper to simply pay the tax than to buy policies that will cost thousands of dollars more.
Most news reports have emphasized that refusal to comply with the health insurance mandate subjects these “scofflaws” to a “modest fee.” But some citizens could face much higher tax taxes — $12,000 a year or more — for failing to comply.
Revealing one of the many inconsistencies in the Supreme Court’s decision on ObamaCare, the syllabus of the decision says that “The payment is not so high that there is really no choice but to buy health insurance.” But, in fact, the annual tax will eventually for many people equal the cost of an expensive health insurance policy.
According to a research arm of Congress, the Congressional Research Service, over time, “families will both pay higher penalties and reach the cap at lower income amounts.” This new ObamaCare tax will, like the Alternative Minimum Tax, hit more and more people over time as incomes rise.
The new taxes are complex and escalate depending upon a person or family’s income. They have basically three tiers:
- Flat fee: The first tier for lower income taxpayers is fixed, starting at $95 for calendar year 2014 (the first year the mandate is effective), $325 in 2015, and $695 in 2016 and beyond. The total family penalty is capped at 300% of this flat dollar tax — $2,085 in 2016 – for those earning less than about $110,000, according to the CRS.
- Percentage of income: The next tier is based upon a percentage of income: 1.0% in 2014, 2.0% in 2015, and 2.5% thereafter.
- Cost of a basic health plan: However, as household income increases, eventually the percentage tax will rise to equal the cost of the national average premium for a “bronze-level health plan,” where it is capped. (The bronze plan is expected to be the least expensive plan in the line-up of policies that will be offered through the ObamaCare health insurance exchanges. The Congressional Budget Office estimates that in 2016 the cost of a bronze-level plan for a family would be between $12,000 and $12,500 a year.)
Buying insurance or paying the tax is portrayed as a neutral choice by Chief Justice John Roberts who wrote in his majority opinion “…imposition of a tax nonetheless leaves an individual with a lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice.”
Buy health insurance or pay a tax. Your choice.
For example, a family earning $120,000 will face a tax of $3,000 a year if they don’t buy health insurance with the government’s stamp of approval. For some, it will make sense to pay the tax and take their chances since health insurance companies will be forced to sell them a policy when they need it at the same price as if they had been paying premiums all along. That will, of course, send the cost of health insurance soaring.
Higher-income individuals face a much larger tax because, for them, the amount of the tax is determined by the cost of a government-approved bronze health plan. A family earning $500,000 a year pays 2.5% of its income in the tax and hits the cap at $12,500. The tax could be higher, of course, if the cost of this government-approved policy escalates.
There are subsidies for some citizens through Medicaid and through new health insurance bureaucracies, plus exemptions for certain classes and categories, such as those qualifying for hardship or religious exemptions or whose incomes are less than the filing threshold for federal income taxes.
Remember that the government will determine what health insurance policies meet its approval to satisfy the individual mandate. If citizens decide they prefer a different health plan, they would have to pay for that insurance as well as pay the new tax.
There are significant new reporting requirements for individuals to prove to the IRS they have maintained qualified health insurance every month during the year, that any premium subsidies they are receiving are justified by their income and family size, and how much their employer paid for their coverage, for starters.
The tax penalty will be collected by the IRS and extracted from any income tax refund due. The legislation, however, ties the IRS’ hands in using its normal collection tactics, such as liens, levies, and criminal penalties.
Surely every family will be making its own calculations and cost-benefit analyses involving the health insurance mandate. McKinsey & Company has reported that as many as 30 to 40 million Americans could forgo health insurance, with some figuring they can purchase a policy whenever they are facing expensive medical bills.
The individual mandate tax is only the newest in a long list of new Obamacare taxes, including a new 0.9% surtax on Medicare taxes for those making $200,000 or more ($250,000 joint) plus a new Obamacare 3.8% surtax on “investment income” for those in the same income categories. This added tax affects dividends, interest, rent, capital gains, annuities, home sales, partnerships, etc.
Over time, these new ObamaCare taxes will hit more and more middle income families. Recall that the Alternative Minimum Tax targeted only 155 taxpayers when the first version passed in 1969, but today it hits millions of people.
Now that the American people see that the Supreme Court didn’t rescue them from Obamacare, there is renewed focus on the details of the law. The individual mandate is only one of dozens of provisions that will slam into our economy, hitting American families like a freight train in 2014.
(Grace-Marie Turner is President of the Galen Institute in Alexandria, Virginia. She will discuss the federal health care law on September 21 at a conference co-sponsored by the Georgia Public Policy Foundation and the Conservative Policy Leadership Institute. This article was originally published by the Galen Institute and Forbes.com.)