Repeal HIT on Consumers and Small Businesses

COMMENTARY Taxes

Repeal HIT on Consumers and Small Businesses

Nov 8th, 2017 2 min read
COMMENTARY BY
David R. Burton

Senior Fellow in Economic Policy

David Burton focuses on tax matters, securities law, entrepreneurship, financial privacy and regulatory and administrative law issues.
Because the HIT is collected from insurance companies, it is effectively hidden from health insurance buyers, including both individual consumers and small employers. iStock

Key Takeaways

After a one-year moratorium, a new Obamacare tax will kick in this January.

The HIT will fall almost exclusively on small businesses and on families and individuals buying insurance on their own.

Those effects make the health insurance tax one of Obamacare’s more damaging taxes. As with the other Obamacare taxes, it should be repealed.

After a one-year moratorium, a new Obamacare tax will kick in this January. As a result, premiums for individual and small group health insurance plans will increase by 2 percent to 3 percent.

The tax will have little effect on large employers and their employees because large firms usually self-insure. But small businesses and families who buy their own coverage will bear the cost of this hidden tax. It should be repealed.

The Internal Revenue Service calls the excise tax a “Health Insurance Provider Fee.” Opponents call it the health insurance tax (HIT). The HIT is not imposed at a specified rate; rather, the effective rate is set annually by the Treasury Department to raise an amount of revenue specified by law.

The tax will raise about $144 billion over the next nine fiscal years. It will cost each family affected about $500 in 2018, rising over time. The HIT is imposed on insurers whose net health insurance premiums exceed $50 million annually. Employers that self-insure are explicitly exempted from the HIT. This means that most large employers can dodge the HIT bullet. In 2015, four of every five employers with 500 or more employees self-insured.

But small businesses won’t be so lucky. Only one in seven firms with fewer than 100 employees are self-insured. The HIT will fall almost exclusively on small businesses and on families and individuals buying insurance on their own.

Small employers will have to get that money from somewhere. They will be forced to cut costs by laying off workers, reducing their workers’ hours or forgoing raises. A study by the National Federal of Independent Business Research Foundation found that, by 2023, the health insurance tax will reduce private-sector employment by at least 152,000 jobs and possibly as much as 286,000 jobs.

Reimposing the HIT will doubtless prompt changes in how companies insure their workers. Obamacare’s excessive underwriting restrictions and benefit mandates have already prompted many employers to abandon their old insurance coverages and self-insure instead. The trend has been especially pronounced among firms with relatively young and healthy workforces.

Since Obamacare was enacted, the percentage of private-sector enrollees in self-insured plans has increased from 57.5 percent in 2010 to 60 percent in 2015. The proportion of small and medium-size firms that self-insure has increased as well.

Not surprisingly, enrollment in fully insured employer group plans dropped by 8.6 million individuals in the three-year period of 2013-16. These effects would probably be larger, but because the repeal of Obamacare seemed likely, some firms deferred moving toward an unfamiliar means of providing health benefits.

This shift can result in a vicious cycle of ever-increasing HITs. As the tax encourages more and more businesses to self-insure, the amount of premiums underwritten (i.e., the size of the taxable base for the HIT) diminishes, which means the Treasury will have to raise the effective tax rate on premiums even higher to raise the set dollar amounts specified by law. Year after year, these escalating taxes will keep driving premium costs higher and higher.

Because the HIT is collected from insurance companies, it is effectively hidden from health insurance buyers, including both individual consumers and small employers. However, because the HIT is functionally an excise tax, it directly increases premiums.

Current estimates are that when the tax goes back into effect in 2018, it will increase premiums by an average of 2 percent to 3 percent. Even worse, that tax rate will further increase as more employers shift to self-insurance plans. That is because the law requires the IRS to extract fixed amounts of revenue from the health insurance premium tax base.

Those effects make the health insurance tax one of Obamacare’s more damaging taxes. As with the other Obamacare taxes, it should be repealed.

This piece originally appeared in Washington Times