Financial planners in limbo after health-care ruling

Supreme Court decision could muddle end of the year wrangling in Congress; which taxes are in, which are out

Supreme Court Chief Justice John Roberts Jr. not only stunned Washington on Thursday by siding with the court’s liberal wing in upholding the massive health-care reform law, he also made the so-called “fiscal cliff” steeper.

In a 5-4 decision, the majority ruled that Congress has the power to penalize individuals who do not purchase health insurance. The court defined the penalty for forgoing coverage as a tax, which is well within Congress’ constitutional authority to impose.

Some of the other – more straightforward – taxes in the health-care law directly impact the high-net-worth clients of investment advisers. On Jan. 1, individuals making more than $200,000 annually and couples making more than $250,000 will see a 0.9% increase in their income taxes and a 3.8% tax on investment income above the earnings thresholds to support Medicare.

So far, these have been somewhat stealth tax increases, but they could get caught up in the “fiscal cliff,” or post-election congressional negotiations that are likely to encompass the expiring Bush tax cuts, defense spending sequestrations, the debt-limit ceiling and other issues.

“The Court’s decision adds to the challenges that Congress will face at year end,” Clint Stretch, a former legislation counsel to the congressional Joint Committee on Taxation, wrote in an email. “Conservatives have been oddly quiet about [the Medicare] tax, perhaps hoping the Court would repeal it for them.”

Conservatives were aghast on Thursday that Mr. Roberts didn’t give them the defeat of the Affordable Care Act that they sought. Now, they’ll have at least one more item on the fiscal-cliff negotiating table.

Curtis Dubay, a senior tax policy analyst at the Heritage Foundation, estimates that a tax increase totaling $494 billion would go into effect in January if Congress fails to extend the Bush administration tax cuts and allows the health-care tax increases to stand.

Allowing the tax hikes to come to fruition would hurt small businesses that are critical to the economy, according to Mr. Dubay.

“We are in no position to be thwarting job creation, not with 13 million people out of work,” Mr. Dubay said. “There should be interest on Capitol Hill in delaying the [health care] tax.”

Even if legislators want to stop the health-care levies, they have a big obstacle to overcome – the law has withstood a Supreme Court challenge and remains in place.

The presumptive GOP presidential nominee, former Massachusetts Gov. Mitt Romney, vowed to overturn the law, if he wins in November. He said it would raise taxes by about $500 billion and destroy jobs.

“What the Court did not do on its last day in session, I will do on my first day if elected President of the United States,” Mr. Romney said shortly after the court issued its ruling. “And that is I will act to repeal Obamacare.”

Although those words likely will find their way into a campaign commercial, they may not mean much when it comes to health care politics. The House is scheduled to vote on health-care-reform repeal on July 11. That bill will be ignored by the Democratic-majority Senate.

Next year, even if Republicans take over the Senate, they’re unlikely to have the filibuster-proof majority Mr. Romney would need to overturn the health care law, assuming he’s in the White House. Now that the coverage penalty has been defined as a tax, Republicans have indicated they may pursue repeal through a process known as budget reconciliation, which pertains to tax policy and requires a simple majority.

That leaves us right where we’ve been for months – looking ahead to the post-election lame duck session of Congress with no idea of what’s going to happen with many tax rates and other policies.

“December is going to be a helluva month for all financial planners,” said Carolyn McClanahan, founder of Life Planning Partners Inc. “They’re probably going to let us know something on Dec.30.”