An Addendum to the Fiscal Cliff

Via Twitter, Tax Policy Center director Donald Marron (@dmarron) makes a good point after reading our analysis last week of the "fiscal cliff" at the end of the year: that various revenue measures from health care reform will also take effect in 2013. These were not included in the analysis because -- whether the Supreme Court upholds the law or not -- Congress is unlikely to do anything with them at the end of the year. These measures are already contained in both current law and current policy projections, and do not represent a decision point for lawmakers, unlike the tax cut expirations and the sequester. However, it is certainly an interesting element to think about in terms of the fiscal impact facing lawmakers and the economy at the end of this calendar year.

The Kaiser Foundation has a handy timeline that shows when different provisions of the 2010 health care reform legislation are scheduled to take effect. The tax increases that will take effect in 2013 include:

  • Increasing the HI tax by 0.9 percent for people making over $250,000 and applying the full 3.8 percent tax to net investment income for those people
  • Increasing the floor for the unreimbursed medical expense deduction from 7.5 percent to 10 percent of adjusted gross income
  • Imposing a 2.3 percent excise tax on medical devices
  • Limiting annual contributions to Flexible Spending Accounts to $2,500
  • Eliminating the employer deduction for Part D retiree subsidy payments

In order to estimate the revenue impact of these provisions, we go back to the original score of the bill. The results? The impact of these revenue provisions is roughly $50 billion in 2013 and 2014. As you can see below, most of that is from the changes to the HI tax.

Deficit Impact of 2013 Health Reform Tax Increases (billions)
  2013-2014
HI Tax Changes $38
Medical Expense Deduction Floor Increase $2
Medical Device Tax $5
FSA Limit $4
Employer Subsidy Deduction Elimination $1
Total $48

Note: Numbers may not add up due to rounding

To some extent, the revenue number is not entirely indicative of the total economic cost of these changes. The tax increase on investment income will cause timing shifts for capital gains realizations, pushing up revenue in 2012 and pushing it down in 2013 (realizations are projected to balloon from $428 billion in 2011 to $651 billion in 2012 before falling to $420 billion in 2013). Thus, the amount of revenue raised somewhat obscures the provision's economic effect in the short term.

If one were to consider the fiscal impact of these tax increases along with the rest of the policies in the fiscal cliff, it would total slightly over $1 trillion in 2013 and 2014.

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