Health-Care Tax Hikes Have Investors Feeling a Little Sick

Investors with a steady stream of income from stocks and other assets could be excused for feeling a little queasy as the health care reform measure nears approval in Washington.

Thierry Dosogne | Getty Images

The latest version of the bill pays for the health care expansion largely on the backs of investors who face a smorgasbord of new taxes on interest, dividends, capital gains and other investment income.

That prospect drew jitters from market pros who see Wall Street already under enough fire from Sen. Christopher Dodd's financial reform measure making its way through Congress.

Health care, expected to be voted on over the weekend, is just adding to an increasingly investor-hostile environment from the government.

"Investors want as little as possible out of Washington. To the extent that you have health care and the Dodd bill out there, there's nothing positive from an investor's standpoint," said Uri Landesman, head of global growth strategies at ING Investment Management in New York. "I can assure that investors want all these bills to fail."

Though the new taxes don't take effect immediately, their potential impact quickly drew concern and helped send the major averages lower in Friday trading.

A 3.8 percent tax highlights the new levies, which target individuals making more than $200,000 a year and families making more than $250,000. The health package also hikes the Medicare payroll tax by 0.9 percentage points to 2.35 percent for the same group.

There also is a 40 percent tax on health benefits that would be delayed to 2018 and apply only to premiums exceeding $10,200 a year for individuals and $27,500 for families.

For investment advisors, the impact of the new taxes wasn't hard to figure out.

"For someone who makes $250,001 and you're retired, it all comes to a $7,250 tax burden that didn't exist two days ago," said Jim Meyer, chief investment officer at Tower Bridge Advisors in West Conshohocken, Pa. "It's several thousand dollars and it's going to affect consumption."

The fiery battle over the plan—President Obama has been making emotional campaign stops this week in an effort to corral public support—was indicative to some of how much concern there was from investors.

"The bickering and the level of rhetoric has reach such inflated levels—it could only get this nasty during a bear market," said Walter Zimmerman, senior technical analyst at United-ICAP in New York. "We see the level of bickering coming out of Washington as clear indication that this bear market has legs."

As for health care stocks in particular, the market has known for quite a while that some type of reform was brewing and thus had time to bake in changes to stock prices.

"If this bill passes there are provisions short-term (for health care stocks) that are not as bad as we thought, but it threatens to be an overhang for the sector," ING's Landesman said. "Clearly health care investors are hoping that this doesn't go through. The sector's outperformed after a a pretty bad run."

The impact of the health care bill could be felt beyond basic stock investing and into Treasurys. Some market pros were concerned that inflation and budget deficits the plan would generate would hit prices and raise yields on the 10-year note, which is traditionally a reliable gauge of inflation pressures.

The 10-year yield actually edged lower in Friday trading, due likely in part to an influx of supply coming with next week's debt auctions.

"There are a lot of unintended consequences we could see developing, assuming it passes and how it goes over in the initial stage," said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco. "There's too much uncertainty over how much exactly is going to transpire out of this. It's pretty complicated. It's fairly negative for the economy and could be fairly bearish for Treasurys."

Meyer predicted that municipal bonds would benefit, however, as they are exempted from federal taxes and could be used by investors to reduce taxable income.

"You can presume that somebody who potentially is in that area close to $250,000 is going to make darn sure they can get their total income as a single less than $200,000 or as a couple under $250,000," he said.

The general uneasiness about the reforms will have wide-ranging effects, Meyer added.

"As we get closer and closer to November the willingness of Congress to do much of anything as it relates to tax legislation is going to get less and less. We're just going to keep pushing things down the road and creating more complicated problems," he said. "To me that is a serious concern. I wish I could tell you how much we should be concerned, what the economic impact is going to be, but it's certainly going to have an impact."