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May 13, 2015

Obamacare: The Grinch Who Stole The Gas Price Windfall

By Michael Pento

Wall Street analysts unanimously cheered last fall when the price of oil fell from nearly $100 a barrel in June of 2014, to almost $45 a barrel by the end of January 2015. The theory was that the average American family, paying less at the pump, would plow this savings into other goods and services, giving GDP a much needed boost.

In the winter of 2014 optimism about a strong 2015 was abound. The average household was now poised to have an extra $750 a year that would soon be burning a hole in their pockets. Falling gas prices would free up billions of dollars for consumers to spend next year, with the spend-happy middle class seeing most of the benefit.

Lower prices at the pump was the equivalent of cutting taxes between $100 billion and $125 billion. Increased consumer spending as a result of lower gas prices were predicted to add as much as a half-percentage point to economic growth in 2015.

With first quarter GDP now running negative, it is clear this “gas tax” did not have the simulative effect analysts had hoped for.

What Happened To Our Gas Tax Windfall?

It appeared most analysts assumed if consumers liked their gas tax cut (much like Obama’s promise to keep their health plan)…they could keep it. Unfortunately Obamacare may be the Grinch who stole the gas tax gift meant for consumers. An increase in what the average American pays in health care costs as a result of the Affordable Care Act (ACA) has swallowed all the savings from the fall in gas prices.
The first victims of Obamacare were small businesses, who quickly learned their once sufficient coverage did not match the arduous ACA mandates. The increase in health care costs passed on by employers caused Individual year-round employees at businesses with 50 to 99 workers to lose $935 in take home pay annually, while those at firms with 20 to 49 workers were out an average of $827.50. And workers with solo coverage now pay an average of $1,081 in annual premiums, according to a Kaiser Family Foundation/Health Research & Educational Trust report–up a whopping 8.1% from a year ago.

But small business and the self-insured are not the only ones suffering the Obamacare wrath. With Obamacare’s onerous Cadillac tax, many who once enjoyed lavish health care plans, courtesy of their large employer, are now paying a lot more for premiums and out of pocket expenses.

Under this law, if an individual health-insurance policy costs more than $10,200, the employer has to pay a 40% excise tax for the amount the policy exceeds that threshold. For family policies, the corresponding threshold is $27,500. This tax goes into effect in 2018 but most employers aren’t waiting for the tax to kick in. They have been busy trading in their employee’s Cadillac for an AMC Gremlin. These high deductible plans are less expensive to the employer, allowing them to avoid the threshold and corresponding tax; but they are more expensive to the employee–burdening them with a lot of additional costs.

And it’s only getting worse for employees of larger companies. Next year, nearly a third of large employers only plan on having the Gremlin on the lot. That is, they are only offering high-deductible plans. This is up from 22 percent in 2014 and 10 percent in 2010, according to a study by the National Business Group on Health.

Fittingly, this year, employees will pay 55% more for health insurance premiums and out-of-pocket medical bills than they did in 2010. This is taking a big bite out of consumer’s disposable income. The average worker with employer-sponsored health insurance will pay about $2,664, or nearly 24% of the total cost of their plan premium in 2016. Five years ago, employees paid $1,835.

When you couple this with the high deductible plans, employees will pay an average of $2,487 in out-of-pocket costs, nearly double what employees paid in 2009. Not too long ago half of employees had deductibles below $500; now, only one-third do. Goodbye gas tax…hello higher health care costs.
Finally we have the previously uninsured, whom Obamacare was designed to help. Surely they are reaping the benefit of all this “affordable care”. Unfortunately, those Obamacare recipients who count on a tax refund to balance their household books may have to look for another way to make those ends meet. Customers who received subsidized coverage based on their estimated income are now seeing tax bills for part or all of the subsidy because their actual income turned out to be higher.

The hard cutoff for subsidies occurs once incomes exceed 400% of the official U.S. poverty rate. Going over that amount by even $1.00 can result in a hefty IRS bill because all those subsidies go to Zero once you surpass that threshold. Health policy analyst and former New York Lt. Governor Betsy McCaughey wrote, “For about 1 in 4 tax filers, it’s turning out to be a nightmare, with extra paperwork and penalties.” It is anticipated that at least half of subsidy recipients owed more in taxes this year due to underestimating their income. And according to H&R Block, sixty-one percent of those filers saw their refunds reduced by an average of $729.

But Obama care isn’t the only reason why the economy won’t achieve “escape velocity”. Cheerleaders on Wall Street don’t want you to focus on the other drags to growth such as stagnant real incomes, the rise in the cost of rental housing and the debt-disabled, overregulated condition of the nation. They only want to talk up the positives; and then provide a myriad of banal excuses (e.g. weather) when the economy fails to live up to their over-hyped expectations. Q1 GDP will most likely produce a negative number for two years in a row and now interest rates on sovereign debt have spiked across the developed world. That doesn’t bode well for a second quarter rebound in growth.

Still, the narrative on Wall Street is that Q2 will finally show a massive boost in consumer spending from lower oil prices. But the truth is there was no boost in retail sales when gas prices were coming down; and there is not going to be one now that gas prices have risen by 31% since mid-January. The decline in oil prices merely helped defray the spike in healthcare costs from the ACA. Therefore, those expecting a Q2 rebound driven by consumer spending from the erstwhile drop in oil prices should, unlike Ms. Pelosi, be careful to “read the bill now that they have passed it.”

About the Author: Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle
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