Tax hikes you may have forgotten about

By Alex Brill, research fellow, American Enterprise Institute
The Hill, February 7, 2013

One of the next ACA taxes scheduled to take effect is a health insurance tax that will hit small businesses and their employees particularly hard. The tax is officially imposed on health insurance companies, but the greatest effect will be felt by their customers because the insurance companies will pass most of the burden on through higher premiums. An analysis by the nonpartisan Joint Committee on Taxation found that the tax will raise insurance premiums on average by $350–$400 per affected family in 2016.

The higher premiums caused by the new tax will also prompt some employers to self-insure rather than purchase true insurance for their workers. The tax exempts employers who self-insure, as well as certain nonprofit insurers who provide more than 80 percent of their services to Medicare, Medicaid, CHIP, or dual-eligible plans.

Normally, when some taxpayers change their behavior and avoid a tax, the tax raises less revenue than might otherwise be expected. Oddly, the insurance tax is designed in a way that prevents any revenue decline. The ACA presets the insurance tax’s total revenue yield at $8 billion next year, rising to $14.3 billion by 2018. To make this possible, each year’s tax is calculated in the following year, with the preset total tax burden allocated among insurance companies based on each company’s share of the market.

If insurance companies raise premiums to cover the tax and some employers respond by self-insuring, the result will be a bigger tax on the employers that remain in the insurance market. Of course, the bigger tax would fuel another round of premium hikes, causing more employers to self-insure, further premium increases, and so on.

According to the Kaiser Family Foundation’s 2012 Survey of Employer Health Benefits, 15 percent of the smallest employers self-insure, roughly half of employers with 200–999 workers self-insure, and 93 percent of firms with more than 5,000 workers do so. Because the smallest employers almost never self-insure, they will end up bearing the brunt of the tax. Midsized firms will be most likely to shift to self-insuring their workers.

Congress and the public may not view insurance companies as sympathetic figures. But it’s the insurance companies’ customers who will be most penalized by this new tax, whether through $400 premium increases or by being forced to run the risks of self-insuring.…

When we are talking about financing our health care system – 17 percent of our GDP – we have to get tax policy right. One tax being imposed by the Affordable Care Act – a tax on health insurers – will surely be passed on to purchasers of health plans in the form of higher premiums. When health health insurance premiums are already unbearable for many, it doesn’t seem wise to adopt a tax policy that pushes premiums even higher.

Another peculiarity about this tax is that self-insured employers are exempt. We have already written about the serious problems with the current trend of small businesses self-insuring – less regulatory oversight, exemption from some of the provisions of the Affordable Care Act, and the vagaries of stop-loss insurance for the self-insured. Yet the insurance tax will increase this unfortunate trend.

Since the global amount of the tax is set in law and it is assessed proportionately amongst the insurers, as many employers convert to self-insurance, the tax payment required of those continuing to be insured through private plans will rise disproportionately. Although this might not reach the level of a death spiral, the distribution would certainly be inequitable.

One of the most important features of a single payer national health program is that it would be funded through equitable tax policies. Everyone pays their fair share, based on ability. Not only could we fix our health care system through single payer reform, but we would have the additional advantage of moving us much closer to an equitable system of taxation.