Another ACA Delay

The latest delay of the employer mandate stole headlines from something more impactful for investors: the new tax on investment income.

The Affordable Care Act recently saw another delay. Source: Andrew Burton/Getty Images.

The Affordable Care Act (ACA)’s road to existence took another twist this week, with President Obama delaying the employer mandate for businesses with 50-99 full-time workers until 2016—no fines for another year. Headlines predictably went into overdrive, speculating about the political (midterms!) and economic impact even though nothing fundamentally changed—a chaotic rollout just got a teensy bit more complicated. But the announcement came on the heels of a CBO forecast about the ACA’s long-term economic impact, and for many, the timing was too tasty to ignore. Which is too bad, because in all the hoopla, headlines seem to be ignoring the one thing that does have impact on investors here and now: the 3.8% tax on investment income that funds the ACA, which shows up on tax returns for the first time this year. Its market impact might be negligible—small tax tweaks aren’t huge variables in global markets—but it does have implications for investment planning.

Markets’ non-reaction to the employer mandate’s first delay last October tells you all you need to know about this one—the ACA has been so widely discussed for so long that markets have dealt with every possible economic outcome. Stocks didn’t see the initial delay as wildly positive or negative—just a small change to a law they had over three years to get used to. Monday’s development was an even smaller change to that same law—and likely more a political ploy than anything else. It’s a midterm election year, after all, and in a contest where Democrats have more vulnerable seats than Republicans, the President was keen to help his party curry favor in Republican constituencies—tweaking the law in favor of smaller firms is a handy way to do that.

It’s also a handy way to score points with voters who were a bit miffed by last week’s CBO report, which projected the ACA would shrink the workforce by the equivalent of 2.5 million jobs by 2024. Not actual job losses compared to today, just a slower pace of job creation as fewer people feel compelled to seek gainful employment thanks to the ACA. With more insurance coverage obtained through exchanges, CBO claims people won’t be as incentivized to work—some deciding not to work at all and others to work fewer hours (which seems a bit odd considering they’d need money to pay for said insurance, but we digress). Here too, headlines’ reactions seemed a touch overstated—the CBO’s forecasts are notoriously off base. The organization itself is nonpartisan, but the inputs it uses come from politicians—skewed by biased assumptions. They then extrapolate these assumptions and recent trends years into the future using straight-line math, ignoring the many changes and unknown variables that could arise. But things always change! This is the same CBO that in 2000 projected a government surplus of $4.5 trillion by 2010—the actual result that year was a $1.3 trillion deficit. Long-term forecasts just don’t have much bearing on the real world.

The 3.8% tax on investment income, however, does. Yet it isn’t receiving much notice, highlighting just how misdirected the coverage of the ACA is. The tax sounds simple at first—a 3.8% surtax on investment income exceeding an adjusted gross income of $200,000 annually for individuals and $250,000 for couples. But the nuances are so complex that the IRS just released a brand new form, 8960, to deal with them. Capital gains, estates, trusts, rental and royalty income and interest are subject, as are some retirement income distributions. For instance, just in case you needed another reason not to buy an annuity, non-qualified annuity distributions are subject to the tax but qualified distributions are not—and the reporting difference amounts to a footnote on the form. The deductions are equally complex. Taxpayers can use a portion of state and local income taxes, investment advisory and brokerage fees, and tax preparation and fiduciary fees to help offset the 3.8% tax, but there is no set calculation, which can leave room for accounting error. CPAs and investors alike do not seem to have complete clarity.

Media, theoretically, could help raise awareness of the issue. But when headlines focus on the political theatrics of the law and bury the tax-related stories, the latter go much less noticed by most investors. Folks instead get caught up in items that have no significant bearing on investment returns or tactical positioning looking ahead. Whatever the CBO said, the chances are high markets won’t much care. Do yourself a favor: Put down the newspaper and call your CPA.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.