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More Taxes

December 28, 2009

By MARTIN VAUGHAN

WASHINGTON–The question of how to pay for new subsidies to cover the uninsured is likely to be one of the most contentious issues in upcoming House-Senate negotiations on health-care legislation. Here’s an overview of how the tax provisions in the two bills stack up.

–High-income Americans are likely to see their taxes increase no matter which side prevails in conference negotiations, but it is a matter of by how much. The House bill included a 5.4% surcharge on incomes above $500,000, or $1 million for married couples. That would raise marginal tax rates as high as 45% in 2011 when the lower rates enacted under President George W. Bush expire.

The Senate bill includes no such income surtax. But it does include an increase in the 2.9% Medicare payroll tax on salaries above $200,000, or $250,000 for married couples.

–Unions and business groups will be working to defeat a 40% excise tax on so-called Cadillac insurance plans. The Senate bill would impose that tax on premiums above $8,500 for individuals, or $23,000 for family plans.

House Democrats are strongly opposed to the tax on high-cost insurance policies, but the Obama administration supports it.

–Health insurers would fare better under the Senate bill in some respects, but not when it comes to taxes. They would face a $2 billion industry-wide tax in 2011, ramping up to $10 billion annually by 2017. The House bill does not include a tax on insurers.

–Drug makers also face a $2.3 billion annual industry tax under the Senate bill, but would escape such a tax under the House version.

–Both Senate and House bills tax medical-device manufacturers. The House bill includes a 2.5% ad valorem tax, which would affect wholesalers and manufacturers and would exempt all retail products. The Senate would impose a $2 billion annual tax in 2011, to be divided among device makers by market share.

–Workers who contribute pretax dollars to flexible health spending accounts, take note: the health-care legislation is on track to put curbs on those accounts. Both Senate and House bills would cap annual contributions at $2,500.

–The amount of medical expenses a person can deduct from taxes would be curtailed under the Senate bill. Under current law, out-of-pocket medical expenses are deductible to the extent they exceed 7.5% of income. The Senate bill by 2017 would allow deductions only for expenses that exceed 10% of income. The House bill does not limit the itemized deduction for medical expenses.

–The Senate bill would impose a 10% excise tax on indoor tanning services.

–The House bill would close a loophole that could allow pulp and paper manufacturers to claim $24 billion in cellulosic biofuel tax credits.

Write to Martin Vaughan at martin.vaughan@dowjones.com

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