Is a Middle Class Tax Increase on the Way?

March 17, 2009 by  
Filed under Taxes

tax_increasePresident Obama lost control over the spendulus bill, letting both the House and Senate tack on some of their favorite new social programs.

More recently, the President stood by meekly as Congress stuffed the omnibus spending bill with raw pork.  His only defense was that it was “last year’s business.”  That’s a funny one, considering that Obama was part of  “last year’s business”  himself.

Now it appears that Congress may have its own ideas about how to fund the President’s new health care initiatives.  The White House wanted to fund it by scaling back itemized deductions for taxpayers making over $250,000 per year.  Congress may very well reject that idea and substitute a middle class tax increase.

The Move to Tax Health Care Benefits

There is now bipartisan support for a proposal to tax health insurance benefits provided by employers to all employees.  Does your employer pay any part of your health insurance premium?  Taxed.  Does your employer fund your FSA or HSA?  Taxed.

Of course, the politicians won’t call this a “tax increase.”  They will use spin words such as “fairness” or “spreading the burden.”  Call it what you want, but it will raise taxes on the 60% of under-65 Americans who receive employer health benefits.  Two of Obama’s budget advisers were openly supportive of this concept before taking  jobs in the administration.

Will Obama Cave?

Obama is caught in a tough position on this issue.  The hallmark of his campaign promises was tax relief for the middle class.  There are millions of  middle class wage earners who would see a significant tax increase if their employer-provided healthcare benefits were taxed.

Obama has a second problem.  Candidate John McCain proposed taxing health care benefits during his campaign.  Obama slammed him for making such a suggestion, calling it a “multi-trillion” dollar tax hike on the middle class.  Will he allow himself to be labeled a complete hypocrite on a prominent policy issue so early in his presidency?

So up to now, Obama has said nothing about this middle class tax and spend health care strategy and it is not in his budget. Yet this past weekend, the White House Budget Director conceded that all health care funding options were on the table, including this one.  I don’t think that  letting his budget director take the heat will firewall the President against a flip-flopping charge.  The Democrat party’s union constituencies will be particularly disturbed.  They love those health care benefits.  For some family health plans, that could mean an extra $7,000-$9,000 in taxable income to a union member.

The Consequences for Small Business

Some of you may think that the solution to the dilemma is to go ahead and tax employer health care benefits – but stick it only to the higher income employees.  I think that will backfire.

I am one of the owners of our small business.  We provide health insurance for our employees.  We pay 100% of the premiums and fund most of the annual HSA deductibles.  Now let’s assume that Charles Rangel and friends decide that those of us who own the business (and make the most money) should be taxed on the value of our benefits.  My reaction will be this:  If you are going to tax my benefits, there is very little incentive for me to purchase insurance as part of a small group, unless the group premium savings exceed the taxes that I pay.  We might decide to give all of our employees a raise and tell them to go buy their own insurance because we are finished with it.  Everyone is on their own to make their best deal.  That helps to insulate the small business owners from the never-ending premium increases, which always seem to exceed the rate of inflation.  Employer-sponsored health care is a huge time and money drain.

I predict that a lot of small businesses will say the heck with the entire health insurance headache and do the same thing.  What will the employees do?  Some of them will take that extra money and use it to buy a new car or take a vacation instead of buying health insurance.  This will shift more of the health care burden back to government.  Maybe that’s part of the grand plan anyway.  Taxing employer provided benefits is just one way to advance the ball toward that goal.

What do you think about the merits of taxing employer health care benefits?

Image credit:  Tiggywinkle

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6 Responses to “Is a Middle Class Tax Increase on the Way?”
  1. I don’t like it. The politicians can say it’s a corporate tax, but it will put more of a burden on workers, either by forcing them to self-insure, or having other benefits reduced (like merit raises). If Obama goes along with this he’s a hypocrite.

  2. oh boy says:

    This is the best way to get Palin elected in 2012.

  3. MasterPo says:

    Of course there’s going to be a middle class tax increase! Come one, get real.

    The top 20% of American earners alredy pay over 60% of the income taxes. There isn’t much more you can squeeze from them.

    The poor by definition have nothing so you can’t tax them.

    Guess who’s left?

    The Messiah already dropped his definition of “middle class” from $250k (during the campaign) down to a mere $75k.

    IMO the next step: Out law or at least GREATLY restrict the tax-free’ness of muni bonds. That will hurt the states (afterall, why buy a muni if not for the tax-free interest).

    Also watch out for taxing 401k’s, IRA’s, SEPs, SIMPLEs etc etc. That’s too golden a pot of money for the gov to keep it’s dirty fingers off. Especially with the HUGE deficits Commrade Obama is running up.

    Welcome to the United Socialist Indebted States of Amerika.

    It’s not your father’s country any more… :(

  4. My Journey says:

    @Master Po,

    I haven’t checked the numbers for in a while, but I am almost positive that the top 20% pay MORE than 60% share lol!

    But the munibond situation I doubt will work out because it has to do with a Supreme Court Case that was heard and decided in the 1800’s…and was actually JUST upheld in 2008 (Google Kentucky v. Davis)

  5. MasterPo says:

    MJ – The muni bonds was just an example. Just how many tax shelters are they going to allow to remain when the gov is spending TRILLIONS$$$ like a drunk sailor?!

    Watch out for your IRA and 401k. That’s next. Mark my words.

  6. Roger says:

    @Master Po: While it make be true that the top 20% of earners in the US pay 60% (or more) of the government’s tax revenue, that doesn’t mean you can’t ‘squeeze more from them’. You have to look at how much of their income they’re actually paying, not how much of the government’s income that translates into.

    James B. Stewart noted in an article in the latest SmartMoney (sadly, no link is currently available online) that the top 400 highest grossing individuals in the US paid (on average) 17 percent of their income toward federal taxes. This is one of the lowest rates they’ve ever paid, and is lower than many middle-class people already pay. The argument that they can’t pay any more is false.

    A better line of discussion is not COULD they pay more, but whether they SHOULD pay more. If so, how much more? And how can we avoid running into Laffer curve problems, where higher tax rates lead to people gaming the system and hide their income? (And as a side note, whether taxing income is the best way to provide the government with funding in the first place.)

    Back to the topic at hand: I think we’re heading, slowly but surely, toward a single-payer, government sponsored system of health care. What exactly the final plan will look like exactly, when it will come into existence, and what, if any, intermediate plans will pop up along the way, I can’t say, but I imagine by the time I’m ready to retire in forty years, employer-paid and sponsored health care will be a thing of the past.

    As for taxing current health care benefits, it doesn’t strike me as good policy, but then, perception is more important in politics than reality. If our lawmakers think they can spin a move like that positively (or that, with everything else going on, it can slip by with nobody noticing), they might charge ahead with it, anyway.

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