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House Bill Would Pay for Tax Breaks by Increasing the Number of Uninsured

The House will consider legislation this week to repeal the excise tax on medical devices and the limitation on the use of flexible spending accounts (FSAs) to buy over-the-counter medicines — both enacted to help pay for health reform.  The proposed legislation would also allow participants to cash out up to $500 in unused FSA balances at the end of a year.

To offset the cost of these changes, the bill would reduce in some cases the tax credits that health reform will provide to help low- and moderate-income families purchase health insurance.  This provision would cause 350,000 people to forgo coverage and make it harder for health reform’s insurance exchanges to work effectively.

In a new series of papers we explain why Congress should not repeal the medical device excise tax and FSA provisions and why the proposed offset is extremely unwise.

The 2.3 percent excise tax on medical devices is one of several new levies on industries that will gain business due to health reform.  As we previously explained, the tax will not make the medical device industry less competitive, since it applies equally to imported and domestically produced devices, and devices produced in the United States for export are tax exempt.  Bloomberg Government has found claims that the tax would cause large job losses “not credible.”

Under another provision of health reform, starting in 2011, individuals may no longer receive reimbursements from FSAs and other tax-favored accounts for the cost of over-the-counter medications and other items — such as aspirin, cough syrup, and sunscreen — without a prescription from a physician.  Only a minority of workers benefits from these accounts, and high-income people benefit disproportionately.  Moreover, for most people, spending for over-the-counter items is minor.  About 9.8 million households used an FSA to purchase over-the-counter medicines in 2010, spending an average of just $136 — conveying a tax benefit of $14 to $48, depending on the household’s tax bracket.  Few people will find it worthwhile to pay to visit a doctor to obtain a prescription for an over-the-counter medicine.

Repealing those provisions would come with a high cost — and the solution included in the legislation would burden some low- and moderate-income people.  The proposed change in the subsidies to purchase health insurance would substantially increase the repayment charges that the Internal Revenue Service would impose at tax time on many low- and moderate-income people who received subsidies during months when their incomes were low, but whose incomes rose when they found a job or received a promotion.  For many families, the amounts they would have to repay would be more than five times higher than the penalty they would owe if they remained uninsured.  That’s why Congress’s Joint Committee on Taxation estimates that the House provision would cause 350,000 people who would otherwise purchase coverage to do without it instead.  Those who forgo coverage would be healthier, on average, pushing up premiums for health insurance purchased through the exchanges and weakening the exchanges’ ability to function effectively.