NCPA - National Center for Policy Analysis

Tax Policy Meets the Affordable Care Act: The Case of the Premium Tax

June 15, 2012

The Patient Protection and Affordable Care Act (ACA) is comprised of myriad policy provisions with important implications: mandates to purchase health insurance; new state-based insurance exchanges; large new subsidies for insurance purchases; the creation of an alphabet soup of new agencies, bureaus and panels; Medicaid expansions, and so on, says Douglas Holtz-Eakin, president of the American Action Forum.

To help pay for this massive expansion of spending, the law also implements a new "fee" on health insurance companies.  Better described as a premium tax, the new source of revenue is substantial in size, despite receiving little attention in media analysis of the health care law.

  • The aggregate annual fee for all U.S. health insurance providers begins at $8 billion in 2014 and rises thereafter.
  • All told, it is expected to raise $80 billion in its first five years.
  • The tax is levied on insurance companies' collected premiums beyond a certain threshold.

The first problem with the "fee" is that it unfairly targets health insurance companies by failing to allow them to consider the fee to be a business expense for tax purposes.  While many similar expenses are classified this way, the fee was precluded from this option and therefore will not be allowed to count as a deduction against the corporate income tax.

Additionally, the fee unfairly targets some insurance companies over others, allowing Washington to pick winners and losers.

  • The issue of tax deductibility is only an issue for for-profit insurers -- this means that not-for-profit insurers will be unduly advantaged in future competition.
  • Additionally, special exemption is given to non-profit companies that receive 80 percent of their revenue by servicing government programs for the low-income, elderly or disabled.
  • This tax exemption includes preferential treatment for income from operations that do not fall within this 80-percent category.
  • Furthermore, for-profit companies that service these same populations are excluded from the tax exemption.

This enormous tax burden will greatly affect the operations of insurers, especially those that did not receive special tax exemptions from Washington.  This will have a significant impact on consumers, resulting in higher premiums and a disruption to regular health care relationships.

Source: Douglas Holtz-Eakin, "Tax Policy Meets the Affordable Care Act: The Case of the Premium Tax," American Action Forum, May 2012.

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