There are other smaller tax hikes in the ACA. Currently, there is no federal limit on contributions to an employer-sponsored Healthcare Flexible Spending Account (FSA) plan, although some firms impose their own limits. The amounts an employee contributes to a Healthcare FSA plan is deducted from taxable salary. Employees can withdraw funds tax-free from Healthcare FSA balances to cover qualified medical expenses. Starting in 2013, the maximum annual Healthcare FSA contribution per employee will be capped at $2,500. Under current law, a taxpayer can deduct itemized medical expenses to the extent that such expenses exceed 7.5% of AGI. Starting in 2013, that hurdle is raised to 10% of AGI, except for taxpayers aged 65 years or older, for whom the increase in the hurdle will not take effect until 2017. In addition, the ACA will impose a series of excise taxes on medical devices, which will begin in 2013. A 2.3% excise tax will apply to medical devices that are not purchased directly by consumers, such as hip implants and coronary stents. Similar fees and taxes will be imposed on health insurers, pharmaceutical companies, and indoor tanning services.

The Supreme Court recently ruled in favor of most of the provisions of the ACA. Unless the new Congress and the president overturn the ACA taxes in early 2013, the ACA tax provisions will start January 1, 2013, as scheduled by law. These new ACA tax hikes would amount to $24 billion in 2013. 

Taxes on Investment Income
Tax rates on dividends and capital gains will rise significantly in 2013 under current law.

The maximum personal income tax rate on long-term capital gains is currently 15%. The new Medicare taxes would add an additional layer of taxation, boosting the top rate to 18.8%. If the Bush income tax cuts expire as scheduled, the maximum income tax rate on capital gains would rise to 20%; combined with the Medicare tax, it would reach 23.8%.

For qualified dividends, the maximum personal income tax rate is currently 15%. The new Medicare taxes would add an additional 3.8 percentage points, making the top rate 18.8%. If the Bush tax cuts expire as scheduled so that dividends are taxed as ordinary income, the maximum income tax rate would rise to 39.6%; combined with the new Medicare tax, the result would be a top rate of 43.4% on dividend income.

The maximum personal income tax rate on taxable interest is currently 35%. The new Medicare taxes would add an additional 3.8 percentage points, making the top rate 38.8%. If the Bush tax cuts expire as scheduled, the maximum income tax rate would rise to 39.6%; combined with the new Medicare tax, the result would be a top rate of 43.4%, the same as for dividends.

Budget Sequester
Congress and President Obama reached a last-minute deal in August 2011 to hike the federal debt ceiling by agreeing to measures to control federal spending. The legislation, called The Budget Control Act (or BCA), called for $917 billion in specific cuts to "discretionary spending" and, to a lesser extent, "entitlement spending" over the next decade. (Discretionary spending is set directly by Congress, while entitlement spending is produced automatically by federal programs.)

The BCA also established a Congressional "Super Committee" charged with making recommendations for achieving a further $1.5 trillion in deficit reduction over the same time period. The committee's recommendations were supposed to be presented to Congress last November and voted on before the end of 2011. Alas, even after extensive negotiations, the Super Committee failed to reach an agreement; the two parties are simply too far apart in their approaches to deficit reduction. Under the terms of the BCA, this failure will trigger a schedule of automatic spending cuts (a "sequester") starting in January 2013. The sequester amounts to a cumulative $1.2 trillion; the cuts would be $109 billion per year for 11 years, shared equally by defense and nondefense spending. Technically speaking, the law cuts budget authority, which is not exactly the same thing as cutting actual outlays because the government does not always spend as much money as authorized. Using guidance from the CBO, if the sequester starts in January as scheduled, a reduction in actual outlays amounting to $87 billion in 2013 is a reasonable estimate.

The defense industry is especially vulnerable in 2013 because it is already being hit by the winding down of spending involving Iraq and Afghanistan and by the restrictions on discretionary spending imposed by the BCA; further cuts by the sequester would be a third round of reductions.

Because the sequester would be painful, Congress has great incentive to find and pass an alternative set of spending limits, but it can only do so if both parties agree. Typically, sequesters are avoided as Congress finds better alternatives. Perhaps Congress will do so again.

First « 1 2 3 4 5 6 7 8 9 » Next