Employers, Wealthy Face New Taxes Under House Health Bill

A House vote on the healthcare bill could come as early as Saturday.

Business groups are looking toward conference negotiations to try to eliminate or water down the House employer penalties.

Firms that did not offer health insurance up to minimum standards spelled out in the House bill would face penalties up to 8% of payroll. The smallest businesses, up to $500,000 in payroll, would be exempt from the penalties.

Companies that have high proportions of low-paid and part-time workers are likely to be hit hardest by the penalties.

"If you currently cover 20% of workers, and 80% are part-timers you don't cover, you will have a very different situation than an IBM, that covers everybody," said John Sheils, a healthcare analyst at the Lewin Group, a consulting firm owned by Unitedhealth Group, Inc. (UHC).

Some private studies have found that many small businesses that now insure their workers would see their health-care costs go down under the House bill, particularly as a result of efficiencies in the small group market.

Individuals with income over $500,000 and married couples making in excess of $1 million would face a 5.4% surtax on income above those amounts. After taking into account the expiration of the Bush tax cuts, those people would face a marginal tax rate of 45%.

The tax would affect 0.3% of U.S. taxpayers, and 1.2% of small businesses. About one-third of the $460.5 billion raised by the surtax over 10 years would come from business income, the Joint Committee on Taxation said this week.

House leaders scaled the surtax back from an earlier proposals, at the behest of a group of rank-and-file Democrats worried about its impact on small businesses.

Some of those House Democrats are holding out hope for further changes in conference. For instance, the $500,000 and $1 million thresholds aren't indexed for inflation, meaning they will affect more and more Americans over time, said Rep. Michael McMahon (D., N.Y.)

The choice between the House's surtax on the wealthy and the Senate's funding mechanism--an excise tax on expensive or "Cadillac" insurance plans--promises to be one of the toughest issues House and Senate negotiators will have to solve.

"The first thing they may try is, what if we take a little bit of each bill," said Clint Stretch, a principal in the national office of Deloitte Tax LLP. "But it's going to be hard to sell the House on the Cadillac plan tax."

Beyond the surtax on the wealthy, the House bill would impose a new $2500 annual cap on contributions to flexible spending accounts, and change the rules so pre-tax dollars in those accounts cannot be used to purchase over-the-counter drugs.

On the business side, the bill would impose a new 2.5% tax on the sale of medical devices, paid by medical device makers like Medtronic Inc. (MDT) and Boston Scientific Corp. (BSX) and wholesalers.

It also limits certain tax deductions foreign multinationals are now eligible for through tax treaties.

The bill requires companies to report payments to vendors who are corporations, in an effort to give the IRS more information to close the tax gap. And it shuts down a tax credit that could have yielded as much as $24 billion to paper companies that produce biofuels using "black liquor," a by- product of the pulping process.

-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@ dowjones.com

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