The U.S. Senate today will begin consideration of H.R. 4872, the “Reconciliation Act of 2010.”  It makes several changes to the healthcare law signed by President Obama today.  Below are the tax changes made by the reconciliation bill to current law:

1. Creation of a new, 3.8 percent surtax on investment income earned in households making at least $250,000 ($200,000 single).  This would result in the following top tax rates on investment income (Tax hike of $123 billion):  

  Capital Gains Dividends Other*
2010 15% 15% 35%
2011-2012 (current law) 20% 39.6% 39.6%
2011-2012 (Obama budget) 20% 20% 39.6%
2013+ (current law) 23.8% 43.4% 43.4%
2013+ (Obama budget) 23.8% 23.8% 43.4%

*Other unearned income includes (for surtax purposes) gross income from interest, annuities, royalties, net rents, and passive income in partnerships and Subchapter-S corporations.  It does not include municipal bond interest or life insurance proceeds, since those do not add to gross income.  It does not include active trade or business income, fair market value sales of ownership in pass-through entities, or distributions from retirement plans.  The 3.8% surtax does not apply to non-resident aliens.

2. Increase the employer mandate tax from $750 per employee to $2000 per employee (disregarding the first 30 employees).  This tax would apply to any employer who does not offer insurance and who has at least one employee eligible for a tax credit to purchase insurance inside the exchange.  If any employee actually receives coverage through the exchange, the penalty on the employer for that employee rises to $3000. (Tax increase of $26 billion when combined with individual mandate)

3. Increase the individual mandate tax from the greater of 2% of adjusted gross income (AGI) or a dollar amount to the greater of the following (See employer mandate score):

  1 Adult 2 Adults 3+ Adults
2014 1% AGI/$95 1% AGI/$190 1% AGI/$285
2015 2% AGI/$325 2% AGI/$650 2% AGI/$975
2016 + 2.5% AGI/$695 2.5% AGI/$1390 2.5% AGI/$2085

4. Decrease Cadillac plan excise tax by delaying the implementation date from 2013 to 2018.  It also increases the threshold for this 40% excise tax from $8500 single/$23,000 family to $10,200 single/$27,500 family.  (Tax reduction of $117 billion)

5. Delays “Special Needs Kids Tax” (FSA Cap) until 2013.  Delays the $2500 FSA cap (2011 under current law) until 2013.  This provision delays the $2500 cap called for in the healthcare bill signed by the President.  It will fall most-heavily on parents who use their FSAs to pay for expensive special-needs tuition pre-tax. (Tax reduction of $1 billion)

6. Raises “PhRMA Tax” from $22.2 billion to $27 billion from 2010-2019 (Tax hike of $4.8 billion).  This is a simple money-grab from the pharmaceutical industry.

7. Changes medical device manufacturing excise tax from flat dollar amount to 2.9 percent excise tax (Tax hike of $800 million).  This switches the money-grab in this industry from a dollar amount to a more conventional excise tax.

8. Raises health insurance tax from $59.6 billion to $60.1 billion from 2010-2019 (Tax hike of $500 million). This is a simple money-grab from the health insurance industry.

9. Delays tax hike on employer-provided retiree Rx drug coverage from 2011 to 2013 (Tax cut of $900 million).  Under the bill the President signed, employers who provide retiree prescription drug coverage in coordination with Medicare would no longer be able to deduct their costs as a business expense.  This moves forward that tax hike.

10. “Black liquor” tax hike (Tax hike of $23.6 billion).  This is a tax increase on a type of bio-fuel.

11. Codification of the “economic substance doctrine” (Tax hike of $4.5 billion).  This provision allows the IRS to disallow completely-legal tax deductions and other legal tax-minimizing plans just because the IRS deems that the action lacks “substance” and is merely intended to reduce taxes owed.

12. Exchange premium credits made more generous  (Tax cut of $1 billion).  This is more statistical scoring noise than anything else.

13. Associated effects on tax revenues (Tax cut of $11 billion). 

TOTAL Net Tax Hike Effect:     $52.3 billion/10 years

CBO Score

JCT Score

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