Tax Changes in House Health Care Bill
July 21, 2009

In the early morning hours of July 17, the House Ways and Means Committee by a vote of 23-18 approved the America's Affordable Health Choices Act of 2009 (H.R. 3200) - also previously referred to as the Tri-Committee Proposal. Committee Republicans and three Committee Democrats voted against the bill which the Congressional Budget Office (CBO) estimates would cost $1 trillion over 10 years.

This health care overhaul will be paid for largely with a graduated income surtax on high-income households, as well as four familiar business tax provisions—including a delay in the implementation of worldwide allocation of interest, a limit in treaty benefits for certain deductible payments, codification of the economic substance doctrine and savings from within the health care system. It also would impose a payroll tax of up to 8 percent on businesses that do not provide and pay for at least 72.5 percent for individuals and 65 percent for families for their employees' qualified health insurance plan.

Under H.R. 3200, approximately $544 billion in revenues would be raised through a surtax of 5.4 percent on married individuals with adjusted gross income (AGI) over $1 million beginning in 2011; a 1.5-percent surtax on incomes between $500,000 and $1 million; and a 1-percent surtax on incomes from $350,000 to $500,000. According to a committee explanation, the lowest two tax rates would be increased to 2 percent and 3 percent, respectively, if health care cost savings are not achieved by 2013. However, this House plan to raise revenue through a surtax on the wealthy may be a nonstarter in the Senate as several members of the Senate Finance Committee let it be known that the provision had little support among senior lawmakers.

The four other tax revenue offset provisions have been included in previous legislation, but have never enacted, would:
• Delay the implementation of worldwide allocation of interest for purposes of determining the limitation on the foreign tax credit from 2011 to 2020;
• Stop foreign multinational companies in tax haven countries from using structures to avoid tax on their U.S. income in which their subsidiaries channel deductible payment through U.S. tax treaty countries before earnings are repatriated to a tax haven;
• Codify the economic substance doctrine by defining economic substance for courts trying to determine whether certain tax avoidance efforts may be abusive;
• Exclude over-the-counter medicines from eligibility for reimbursement from health reimbursement arrangements, health flexible spending accounts, health saving accounts, and Archer medical savings accounts.

Other key tax provisions included in the 1000-page health care bill are the health insurance tax credit for smaller firms and the payroll tax penalty for non-participating firms. A small-business tax credit would be provided equal to 50 percent of the amount paid by a smaller employer with fewer than 11 employees and average annual compensation of less than $20,000 for the employee’s health insurance. It would phase out in the case of employers with 10 to 25 employees, and also for employers with average wages of $20,000 to $40,000 per year. The credit would not be allowed with respect to employees making more than $80,000 annually.

Additionally, the bill would require employers to provide health insurance or pay an 8 percent payroll tax. Small businesses with an annual payroll less than $250,000 would be exempt. The tax starts at 2 percent of payroll for firms whose payroll exceeds $250,000 and rises to 8 percent for firms with payrolls exceeding $400,000.

According to House Majority Leader Steny Hoyer (D-Md.), Congress is on schedule to pass a budget-neutral health care reform bill in 2009. The goal is to pass reform legislation in the House and Senate before the August recess, and lawmakers hope to have a bill on the president's desk by the end of the first session of the 111th Congress.

Please click here for additional details on the Senate and House health care reform bills.