This is the third installment in a five-part series on the taxes embedded in Obamacare. The first installment, “The five tax hikes in Obamacare that most hurt seniors,” can be found here. The second installment, “Obamacare’s tax war on women,” can be found here.
The jobs-killing Obamacare law contains 20 new or higher taxes on American families and employers. Many of these tax increases fall on families making less than $250,000 — a direct violation of candidate Obama’s promise not to raise “any form” of taxes on these families. This Friday marks the second anniversary of Obamacare being signed into law. The Supreme Court will be hearing oral arguments about the constitutionality of Obamacare next week.
Out of the 20 new or higher taxes in Obamacare, there are four that most hurt young adults and children. Every single one of these taxes violates President Obama’s “firm pledge” not to raise any form of taxes on families making less than $250,000.
The first is the “individual mandate” excise tax. Under Obamacare, all young adults must purchase “qualifying health insurance” (defined by unelected federal bureaucrats) or face an excise tax penalty of at least 2.5 percent of adjusted gross income. For many people in their late 20s or early 30s, health insurance may not fit into a budget that includes paying back student loans, starting a family or finding a job. Others might want to obtain health insurance, but find their preferred plan is no longer “qualified” by President Obama’s HHS bureaucrats. Raising taxes on young people is the wrong way to get them to buy health insurance.
The second Obamacare tax hike on young adults and kids is the “medicine cabinet tax.” This tax increase is already in effect. Since January of 2011, young people have not been able to purchase non-prescription, over-the-counter medicines from their flex-spending accounts (FSAs) or health savings accounts (HSAs). Since many young people require only light use of medical providers and can treat many illnesses over the counter, this tax increase falls on a large percentage of their actual out-of-pocket health expenditures.
Many of the products that parents buy their children fall victim to this tax. Cough syrup, ear infection medicine and children’s pain relief products all must now be purchased on an after-tax basis. This raises the cost of providing health care to children.
The third Obamacare tax hike on young adults and kids is on FSAs. Many young people and parents of young children participate in flex accounts (FSAs) at work. Obamacare imposes a new cap of $2,500 per year on these accounts, which currently face no limits from the tax code. This will, again, fall largely on parents with young children. Consider braces, for example. A parent needing to buy a $4,000 pair of braces might want to run that cost through their flex account to make it pre-tax. A $2,500 cap makes that impossible for the whole cost.
Another example is tuition for special-needs education, which can be claimed as a flex-account reimbursement expense. Children with severe developmental disabilities often require special education that can run well in excess of $10,000 per year in tuition. Thus, the FSA cap hurts families with special-needs children.
The fourth Obamacare tax hike on young adults and kids involve health savings accounts (HSAs). Many young people are embracing HSAs. According to the Employee Benefits Research Institute, there are now more than 8.4 million accounts containing $12.4 billion in assets. Those numbers are up 55 and 70 percent, respectively, in just one year.
There’s a good reason why. AHIP, the health insurance trade association, reports that premiums for HSA-qualified plans are 20 to 40 percent lower than “gold-plated” first-dollar plans. The average premium for an HSA-qualified health insurance plan is about $4,200 for a single person, compared to over $7,000 for a first-dollar plan — a savings of 40 percent. Fifty-two percent of the 12 million Americans covered by an HSA are under age 40.
Obamacare will kill off HSAs in several ways. First, Obamacare imposes a 20% surtax on non-health, pre-age 65 withdrawals from HSAs. For some people, this will result in a marginal tax rate on non-health distributions of over 60 percent. This “Fort Knox” treatment of HSAs will discourage young people from opening them in the first place.
Secondly, Obamacare prevents HSAs from being used to purchase non-prescription, over-the-counter medications.
Finally, HHS regulators are trying to strangle HSAs by imposing “medical loss ratio” (MLR) rules that make it almost impossible for HSA-qualified health insurance plans to operate properly.
Obamacare is a bad deal for everyone, even young adults and children.
Grover Norquist is president of Americans for Tax Reform and co-author (with John Lott) of Debacle: Obama’s War on Jobs and Growth and What We Can Do Now to Regain Our Future.