Taxing the Uninsured: The Latest Estimates

What Will the Affordable Care Act “Tax” Cost Families?

Washington, D.C., July 25, 2012—The Supreme Court recently classified the charge for failing to purchase health insurance under the Patient Protection and Affordable Care Act as a tax rather than a penalty. This novel categorization raises questions about how it will affect families’ tax bills and taxpayers’ behavior. These questions are answered in a new analysis from the Tax Foundation.

First, the analysis reveals that it will be a large tax, particularly on the poor. Most of the uninsured will end up paying at least $1,000. A single filer earning $25,000 will pay $695, which is 2.78 percent of his income. A family of four earning $25,000 will pay $2,085, which is 8.34 percent of their income. A family of four earning $20,000 will also pay $2085, which is more than 10 percent of their income.

Second, higher income families generally pay a higher amount, but actually a smaller percent of their income, making this a regressive tax. While a family of four earning $20,000 will pay more than 10 percent of income, the same family earning $100,000 will pay about 2 percent of income.

“The Supreme Court decided to treat the individual mandate as a tax instead of a penalty, partly on the basis that the mandate would not impose an ‘exceedingly heavy burden.’ This view is not supported by the numbers,” said Tax Foundation economist William McBride. “The tax/penalty would be at least $1,000 for most of the uninsured and more than $12,000 for high-income earners. Low-income families would be hit the hardest, as the tax would be as high as 10 percent of income.”

About half of the uninsured will either receive coverage under Medicaid or choose to purchase insurance through exchanges, rather than pay the tax. The main effects would be 1) a transfer of wealth from the uninsured to the healthcare industry, and 2) more healthcare consumption. The U.S already spends roughly twice as much on healthcare as any other country.

For those who choose to remain uninsured, and are not otherwise exempt, the tax/penalty would carry with it exceedingly high additional burdens in the form of compliance costs, due to complexity and non-transparency, as well as administrative costs, as we ask a revenue agency to verify insurance. Finally, the economic distortions are likely to be large, if unpredictable.

Tax Foundation Fiscal Fact No. 321, “Taxing the Uninsured: The Latest Estimates” by William McBride is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.