AMT 2: Health Insurance Tax

The Alternative Minimum Tax (AMT) is perhaps the greatest example of how dysfunctional and cowardly the United States Congress can be, but a new tax on health insurance may soon steal the title.

The AMT was originally created in 1969 to target the 155 incredibly high-income households. Because the AMT was not indexed to inflation (and numerous other changes to the federal tax code), if it were allowed to go fully into effect, it would create a tax increase for millions of Americans.

The United States Congress is extremely reluctant to raise the taxes of millions of Americans, especially in the haphazard way the AMT would. If you think Congress would simply repeal or fix this unpopular tax, you are wrong. Even though the AMT has not been fully in effect for years, and everyone in Congress agrees it will never will again, Congress is afraid to fix or eliminate it. "Fixing" the AMT would greatly increase our nation's “projected” deficit. Instead, Congress “patches” it every year so that it can pretend that the AMT will go into effect next year.

A new tax on health insurance benefits may soon follow the same childish accounting trick as the AMT. The AP is reporting that the Senate is planning to tax some health insurance benefits to pay for health care reform. The problem is that this tax on health insurance benefits will not go into effect until 2013.

This new tax on health insurance benefits would effect millions of middle-income Americans. It is politically difficult enough to convince Americans to accept higher taxes in exchange for a popular goal like health care reform. To try and put the tax into effect several years after the reform seems politically impossible. It will be pain completely disconnected from the gain.

If the tax on health insurance benefits is scheduled to go into effect in 2013, I suspect it never will. I can easily envision a future where the health insurance benefit tax is the AMT redux -- an unpopular tax that will be “patched” for years. Taxing insurance benefits starting in 2013 is not a practical way to pay for health care reform. It is a way to claim you will pay for reform.

*To be charitable many politicans are convince that many pro-prevention reforms will save large amounts of money, but the CBO is unwilling to score them. The hope maybe that once the reforms have been in place for several years the CBO will be able to score them and dramatically scale down the size of a new tax on health benefits. Either way I'm highly sceptical that this tax as written will ever go fully into effect.

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