As the ink dries on the Supreme Court’s health care ruling, advisors are figuring out how the law will add to their clients’ as well as their own costs. Considering the Patient Protection and Affordable Care Act’s broad reach, one simple thing is true of the PPACA’s potential tax and investment consequences: it’s complicated.
Doctors, for example, can expect individually to be socked with at least 20 new taxes over the next 10 years, according to Jeffery Van Wart, manager for the Houston branch of national broker-dealer and RIA Cantella & Co., which manages nearly $1 billion and serves both physicians and medical groups.
From an investment standpoint, Van Wart said, both doctors and medical groups are staying liquid and in securities such as safer tax-free municipal bonds while they wait to see how the PPACA shakes out over the next few years.
“They’re not willing to take on a lot of risk because so much is so uncertain about how this is going to affect their income both individually and in the industry as a whole,” Van Wart said in a phone interview with AdvisorOne on Thursday. “We’re living in a world of negative uncertainty. The bill is so cumbersome that you have to be a political scientist and legal scholar to understand it all. What we do know is that there are a lot of new taxes because the law has to be paid for, and that’s never a positive for a business.”
Health Law’s Costs May Strike as Bush Tax Cuts Disappear
Van Wart said he has been experiencing a sense of disbelief that the PPACA’s requirements may hit him in the wallet at the same time that the Bush tax cuts fall off the fiscal cliff on Jan. 1. Already, he said, as an independent contractor he pays $1,400 per month in health insurance premiums for his family policy.
People will quickly find ways to undercut the law, Van Wart predicted. As a hypothetical example, he said, if he made $500,000 a year and paid the 1% penalty tax instead of buying insurance, that $5,000 cost would be substantially less than what he pays now for his health policy. “And if something bad happened to me, they couldn’t refuse me, so I’d just go get some insurance then and get coverage,” he said. “So it would be cheaper for me not to have insurance, pay the tax, and then go get insurance [after getting sick] because they’ve got to take me. It’s absurd.”
Van Wart still hopes that the PPACA will be overturned – and he is not alone. Republicans in both houses of Congress have sworn that they will take up a vote to put an end to the health care law, and presidential candidate Mitt Romney has promised to put a repeal into motion if he wins.
At issue for many advisors is the Supreme Court’s 5-4 ruling that the health care law is a tax. Indeed, the historic ruling written by Chief Justice John Roberts says that the PPACA’s mandate for individuals to buy insurance falls under lawmakers’ power to levy taxes. Republicans are now accusing Obama administration officials of forcing the bill through Congress in 2010 while lying that the mandate wasn’t a tax.
“Look, reconciliation is available because the Supreme Court has now declared it a tax,” Republican Senate Minority Leader Mitch McConnell told “Fox News Sunday” on July 1. “They have unearthed the massive deception that was practiced by the president and the Democrats, constantly denying it was a tax.” (Romney, meanwhile, has faced charges that his Massachusetts health care plan also amounts to a tax.)
Democrats, for their part, have declared the June 28 Supreme Court decision a victory. The Democratic Senatorial Campaign Committee raised $2.5 million in the three days following the ruling, according to a Huffington Post report, and the Democratic Congressional Campaign Committee said it had raised another $2.3 million. However, the report also said that the National Republican Senatorial Committee has witnessed a significant uptick in donations because the ruling confirms that the PPACA constitutes a massive tax on small business.
Preparing Clients for Income Taxes as High as 43.4%
Politics aside, one thing is certain: the PPACA gets the majority of its funding through tax increases on the highest earners. Individuals must pay a 3.8% tax on investment income if they earn more than $200,000 annually, and couples likewise must pay the investment income tax if they make more than $250,000. In addition, the act imposes a 0.9% tax increase on wages for people who earn that much.
According to Tim Steffen, director of financial planning at Robert W. Baird & Co., the most obvious repercussion of the court ruling is that some investors may trigger capital gains they were thinking about taking in 2013.
“High earners may accelerate income from stock options or bonuses into this year to avoid the additional 0.9% tax on their wages above the thresholds scheduled for 2013,” said Steffen in a statement, but he cautioned investors not to overreact as months remain before year-end to consider market performance and make investment decisions. The results of the presidential election in November also may change tax policy, he noted.