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Don’t Delay or Repeal Health-Related Taxes

December 9, 2019 at 2:45 PM

As part of year-end tax and spending legislation, Congress may consider delaying or repealing several tax provisions in the Affordable Care Act (ACA): the 2.3 percent excise tax on medical devices, the fee on health insurance providers (the “health insurance tax”), the excise tax on high-cost health insurance plans (the “Cadillac tax”), and the limitation on using tax-advantaged health accounts to buy over-the-counter medicines. These taxes raise needed revenue and represent sound public policy, and further delaying or repealing them would be unwise.

Medical device tax. The medical device industry has heavily lobbied Congress to repeal the device tax, but its arguments don’t withstand scrutiny. The tax has a minimal effect on consumers; it doesn’t apply to eyeglasses, contact lenses, hearing aids, wheelchairs, or any other devices that the public generally buys at retail for individual use. The tax doesn’t cause manufacturers to shift production overseas, since it applies equally to imported and domestically produced devices. While the tax was in effect from 2013 through 2015, it had little or no discernable effect on employment or innovation in the device industry. Policymakers have suspended the tax through the end of 2019; repealing it would cost about $25 billion over the next ten years.

Health insurance tax. An annual fee on most businesses that sell health coverage to individuals, employers, and governments, this tax took effect in 2014 but policymakers suspended it for 2017 and 2019. Insurers say continuing the suspension would make coverage more affordable but, at best, it would reduce individual market premiums by less than 3 percent, according to industry-sponsored estimates, and cost about $15 billion in 2020 and more in later years. Moreover, extending the moratorium into 2020 would do virtually nothing for consumers at this point, since premiums for next year are already set. Other policies, such as increasing federal premium tax credits that help low- and moderate-income people buy health insurance, would do much more to make individual market coverage more affordable for the same cost.

Cadillac tax. This 40 percent excise tax on a health plan’s value over a certain threshold is designed to slow health care cost growth by discouraging firms from offering extremely expensive coverage that promotes the excess use and inefficient delivery of health care. Although the tax would initially apply to only a small share of premium dollars, it would significantly reduce national health spending in the long run and raise wages, the Congressional Budget Office projects.

The tax was originally scheduled to take effect in 2018, but policymakers have delayed it twice; it’s now set to take effect in 2022. Rather than repeal or further delay it, policymakers should either modify it to address various concerns (as the Obama Administration proposed) or replace it with a similar measure to contain costs, such as a well-designed cap on the tax exclusion for employer-based coverage (as several conservative analysts have suggested). Repealing the tax without a replacement would cost almost $200 billion over ten years and much more over the longer term.

Limitation on tax-advantaged health accounts. The ACA conformed the definition of medical expenses that individuals can cover with flexible spending accounts (FSAs) and other tax-advantaged health accounts with the income tax’s long-standing definition for itemized deductions. As a result, individuals can’t use these accounts to buy over-the-counter medications without a doctor’s prescription. The House Ways and Means Committee recently approved a bill to repeal the limitation, which has been in effect since 2011. That would be unwise for four main reasons.

First, not that many workers benefit from these accounts. Just 1 in 5 low-wage workers and 44 percent of all workers have access to an FSA, and only a minority of those with access participate. Second, high-income people benefit disproportionately from FSAs because they’re in higher tax brackets, tend to consume more health care, and can afford to deposit larger amounts in their accounts. Middle- and lower-income people benefit much less because they pay little or no income tax. Third, using different definitions of “medical care” for itemized deductions and tax-advantaged accounts would confuse taxpayers and make it harder to enforce compliance. Fourth, the Ways and Means bill, which also makes other changes to health accounts, would cost $8.5 billion over ten years.

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