NCPA: Prescription Drug Bills Contain Hidden "Surprise"

Price of Drug Benefit May Render IRAs, 401(k)s Worthless

WASHINGTON, D.C. (October 16, 2003) -- Prescription drug bills currently before a House-Senate conference committee would impose higher marginal tax rates on seniors with modest incomes than those faced even by the wealthiest Americans, according to a report released today by the National Center for Policy Analysis (NCPA).

"Both bills implicitly tax low-income seniors at rates that equal and often exceed 100 percent," said Stephen J. Entin, president of the Institute for Research on the Economics of Taxation and author of the report. "Additional drug subsidies are withdrawn for low-income seniors earning between $13,000 and $15,000."

The implicit tax penalty from the loss of benefits under both bills will encourage seniors to spend down or hide assets, Entin explained:

  • Example #1: Under the House bill (HR 1) if a senior who buys $2,000 in prescription drugs annually and has income of $12,960 (135 percent of the poverty level) withdraws just $1,500 from an Individual Retirement Account (IRA), she would lose $956 in subsidies - a tax rate of 66.4 percent on the additional income.
  • Example #2: Under Senate bill (S 1), if the same senior spent $4,500 on drugs and withdrew $2,400 from an IRA, she would lose $2,571 in subsidies - an implicit tax rate of 107 percent on additional income.
  • Example #3: If the patient in example #2 spent $5,813 per year on drugs, every time she withdraws $1 from her IRA, she loses $1.56 in subsidies - an implicit marginal tax rate of 156 percent!

"These are horrendous taxes to impose on seniors of modest means," Entin added. "Asset tests and means tests in both bills will encourage seniors to spend or even give away assets, such as IRAs and 401(k)s, rather than lose the prescription drug subsidy year after year."

The implicit tax penalty from the loss of benefits discourages them from working, according to the report. Seniors face these marginal taxes whether they withdraw money from tax-deferred IRAs or earn extra income from a part-time job.