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A Project of The Annenberg Public Policy Center

Tim Scott’s Misleading Tax Claims

Sen. Tim Scott claims that the Affordable Care Act’s taxes of $800 billion hit small businesses and families. But that’s misleading on several levels: It overlooks the tax credits available to both; much of the 10-year tax figure Scott cited affects individuals earning more than $200,000, a small fraction of all taxpayers; and there are few taxes directly affecting small businesses.

The South Carolina senator made his claim on NBC’s “Meet the Press” on Feb. 2. He actually said that “Obamacare takes another $800 billion out of the pockets of small-business owners through higher taxes and more revenues,” but his press secretary tells us he meant to say the money comes “out of the pockets of small-business owners and families.”

The claim is similar to past misleading statements from Republicans, who have claimed the taxes in the law are “middle-income tax increases” and tax increases on “the American people.”

Some small-business owners and some families — those with higher incomes — will face higher taxes. But other Americans — those with lower incomes — will benefit from tax credits and subsidies, a fact Scott leaves out.

The $800 billion number is an estimate from the Congressional Budget Office and Joint Committee on Taxation on how much government revenue would be lost over 10 years if the Affordable Care Act were repealed. Over the 2012-2021 period, CBO and JCT estimated that repealing the law would reduce revenues by about $813 billion. So, keeping the law in place does increase government revenues by about $800 billion.

But the law also includes an estimated $604 billion in net government spending over that same time period, says the same CBO/JCT report. Included in that figure is $519 billion in premium and cost-sharing subsidies that would go to “families.” Hundreds of millions of dollars more pay for an expansion of Medicaid.

Of course, the families receiving the tax credits are not the same ones getting hit with much of the tax increases. Those receiving subsidies earn between 100 percent and 400 percent of the poverty level, meaning a family of four earning up to $95,400 would be eligible for subsidies. And those eligible for the Medicaid expansion, in states that are expanding the program, earn up to 138 percent of the poverty level, or $32,913 for a family of four.

About 40 percent of those $800 billion in taxes, meanwhile, hits families earning more than $250,000, for married couples, or $200,000 for single individuals. The taxes affect those higher-income taxpayers in two ways: They’re subject to increased Medicare payroll taxes of 0.9 percent on income above those thresholds, and they pay a new 3.8 percent tax on investment income. A 2012 Joint Committee on Taxation report estimated those two taxes would bring in $317.7 billion over 10 years.

A small percentage of American families would be affected by those tax increases. According to Tax Policy Center estimates, 2.8 million tax filers (some single, some married “tax units”) earned above the $200,000/$250,000 adjusted gross income thresholds in 2013. That’s 1.8 percent of all tax units.

Some small-business owners earn more than $200,000, but not many. A 2011 Treasury report estimated that 8 percent of small-business owners earn that much or more. That’s the report’s “narrow” definition of small-business owner, which is anyone earning at least a quarter of income from a business that earns no more than $10 million. We’ve written before about Republicans’ misleading attempts to label increased taxes on upper-income folks as increases on “small businesses.”

Other taxes in the law, however, will affect families earning less than those amounts, though mainly in the form of indirect taxes, as businesses pass along increased costs to consumers. The pro-business Tax Foundation says altogether about half of the total taxes in the law over 10 years — $401.5 billion — would affect those earning less than $250,000 a year.

More than a quarter of that figure, $111 billion, comes from a tax on “cadillac” or high-cost health plans, but the tax itself isn’t what is expected to bring in the majority of that money. Instead, the revenue comes from increased income of workers. As we’ve explained before, the JCT and CBO expect employers and employees to choose less expensive plans, insurance policies that won’t be subject to the “cadillac” tax. In lieu of the more expensive benefits, employers would increase workers’ wages, money that would then be subject to payroll and income taxes, unlike health benefits. That increased payroll and income tax revenue is mostly how this tax brings in money for the government.

Few of the remaining taxes listed by the foundation could be considered direct taxes on families. There are limits placed on the tax benefits of health savings accounts, such as limiting the use of those accounts to buy over-the-counter drugs, and the law increases the threshold for deducting medical expenses. Those changes will affect those who take advantage of such tax rules. And there’s the fine for people who don’t have insurance. But the rest of the taxes are indirect, in the form of pass-along costs — the 10 percent tax on tanning services, for instance, and taxes on drug manufacturers and medical device manufacturers.

Taxes on ‘Small Businesses’

Scott further stressed the impact on small businesses by claiming that a tax on medical devices affected them. It’s expected to bring in a total of $29 billion over 10 years.

Scott, Feb. 2: Another aspect of Obamacare that we should address very quickly is the medical device tax. Here’s another $29 billion leaving the pockets of small business owners, which makes it more difficult to create jobs.

This tax is imposed on clinical medical devices sold in the United States. Stents, CAT scan machines and other devices sold to hospitals and other health care providers are those subject to the tax. Consumer medical devices, such as hearing aids and wheelchairs directly purchased by consumers, are exempt from the tax.

One industry group, the Advanced Medical Technology Association, told us that 73 percent of the more than 5,000 companies in the industry have fewer than 20 employees. So, small businesses will be affected. But the tax would disproportionately affect the very large businesses that are also in the industry and, because of their size, are responsible for a greater percentage of sales. One of the larger device manufacturers, Stryker, has 24,000 employees, for instance; another, Covidien, has 38,000 workers.

A 2013 Congressional Research Service analysis on the device tax said: “The top 1% of firms (by asset size) accounted for approximately 80% of receipts in the industry in 2010.” So, the bulk of the $29 billion in revenue wouldn’t come from the “small businesses” in the industry.

And perhaps none of the revenue would ultimately come from the companies themselves, but instead from those purchasing these devices or using them. The Tax Foundation includes the device tax among those that would be “passed on to all consumers in the form of higher prices and premiums.” And the CRS report agrees, saying that “most of the tax will fall on consumer prices, and not on profits of medical device companies. The effect on the price of health care, however, will most likely be negligible because of the small size of the tax and small share of health care spending attributable to medical devices.”

We asked Scott’s press secretary, Greg Blair, what other taxes in the ACA would affect small businesses. He said the senator also was referring to the tax on health insurance providers, which would total $101.7 billion over 10 years. He directed us to a graphic from the trade group America’s Health Insurance Plans, which is opposed to the tax. The graphic shows the tax being passed along to consumers, either through small employers or large employers, if that’s where they get their insurance, or directly to individuals buying insurance on their own.

So, the two taxes to which Scott was referring total $131 billion, would affect large employers not just small ones, and would likely be passed along to consumers rather than be borne by the businesses themselves. Beyond that impact, small businesses stand to benefit from the law. Those with fewer than 25 full-time workers and average wages below $50,000 could be eligible for tax credits to help them provide insurance for their employees. Those credits total $38 billion over 10 years, according to the CBO.

Scott gives a misleading impression in claiming that “small businesses and families” are hit by $800 billion in taxes. He overlooks tax credits and subsidies that specifically help those groups, and includes more than $300 billion in taxes that affect upper-income taxpayers. They certainly qualify as “families,” but they’re a very small percentage of American taxpayers.

— Lori Robertson