What is the California Sick Tax?

Federal law instituted Health Savings Accounts as of January 1, 2004.  These are accounts that you own and can use to spend pre-tax dollars on your health care – health spending that you control, not the government or an insurance company.  It’s kind of like a “401(k) for your health”.

Unfortunately, Californians cannot take full advantage of this, because the state has not reconciled its tax code to give you the same personal income tax deduction that the IRS does. California, with high personal income taxes, is one of the last states to tax Health Savings Accounts.

The California Sick Tax Clock measures the amount of Californians’ health dollars that the state has taken since January 1, 2004.  It will run until the California legislature enacts tax conformity with the Internal Revenue Code.

The table below shows the assumptions and estimates for the California Sick Tax Clock.



In 2004, 7,500 California individual tax returns reported a total of $20 million in HSA contributions, which Californians had to add back to their AGI (adjusted gross income) for the purpose of calculating state income tax. The Franchise Tax Board reported this and used an estimated average state marginal tax rate of 7 percent to calculate the state tax revenue of $1.4 million. The state has not reported figures for subsequent years, although the Franchise Tax Board has forecast estimates.

Information Strategies, Inc. surveys Health Savings Accounts and reports the number of HSAs nationwide, as well as dollar balances, quarterly. In August 2007, it reported second quarter figures and forecast figures for 2007. The number of U.S. HSAs in the table for 2005 through 2007 is from this report. The estimated number of U.S. HSAs in 2008 is this author’s estimate from extrapolating the (very high but slowing) 2005-2007 growth rate to 2008. The average dollar contribution for 2005-2007 is the 2nd quarter balance reported for each calendar year, with the balance for 2008 extrapolated in the same way as the number of HSAs.

We assume that HSA holders spend their accounts during the year on medical expenses. Thus the average dollar balance approximates the annual contribution. California comprised about 10 percent of the national population, and California employers are only 60 percent as likely as the national average to offer consumer-directed health plans. This we estimate the number of California HSAs to be 0.6 x 1=0.06 of the U.S. number of HSAs. The California Sick Tax Clock counts the total California Sick Tax starting from January 1, 2004 to date.

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