Taxing the Uninsured: The Latest Estimates

Download Fiscal Fact No. 321: Taxing the Uninsured: The Latest Estimates

Introduction

On June 28, 2012, the U.S. Supreme Court upheld the Patient Protection and Affordable Care Act (ACA), also known as “Obamacare,” as a legitimate exercise of Congress’ power to taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. . Our brief to the Court asserted that the individual mandate is a penalty and not a tax,^[1] so the Court’s conclusion that it is a “tax” raises certain questions. How will it work? How will it affect families’ tax bills? How might it change taxpayers’ behavior?

The Rules

The ACA “tax” for not purchasing health insurance is a little complicated. Effective January 1, 2014, most Americans without health insurance will be required to make a payment to the U.S. government. Once fully in effect, it is the greater of:

1. A flat amount of $695 per adult taxpayer plus $347.50 per dependent under 18. This is the fully phased in amount in 2016, which is adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. thereafter. In 2014 it will be $95 per adult plus $47.50 per dependent. In 2015 it will be $325 per adult plus $162.50 per dependent. The flat amount per family cannot exceed three times that for a single individual.
2. 2.5 percent of income over the filing threshold^[2] for federal income taxes. The threshold for 2011 was $9,500 for most single filers, $19,000 for most married filers, and $12,200 for heads of household. It is indexed to inflation.

The total tax cannot exceed the national average premium for “bronze level” qualified health plans offered through exchanges, where bronze plans are those that cover 60 percent of expenses for a standard population. The Congressional Budget Office (CBO) estimates that in 2016 this average premium would be about $4,750 for single policies and $12,250 for family policies. ^[3]

However, a number of people are exempt, from both the mandate and the tax, including: ^[4]

1. Those earning less than the filing threshold for federal income taxes.
2. Those with certain hardships, determined by the Secretary of Health and Human Services.
3. Members of certain religious organizations.
4. Members of certain Indian tribes.
5. Americans living abroad.
6. Inmates.

One part of the law that the Supreme Court struck down was the requirement that states provide Medicaid coverage for all those making less than 133 percent of the poverty level. This means a much larger number of low-income people could be subject to the tax, particularly childless adults and working parents.[5]

The Effects

The table below shows how the mandate would work for various family arrangements and income levels, using the fully phased in numbers for 2016.

Tax/Penalty for Being Uninsured, by Income and Family Size
	Income of $25,000	Income of $50,000	Income of $100,000	Income of $500,000
Family Type	in $	as % of Income	in $	as % of Income	in $	as % of Income	in $	as % of Income
Single	$695.00	2.78%	$1,012.50	2.03%	$2,262.50	2.26%	$4,750.00	0.95%
Single with One Dependent	$1,042.50	4.17%	$1,042.50	2.09%	$2,195.00	2.20%	$12,195.00	2.44%
Single with Two or more Dependents	$1,390.00	5.56%	$1,390.00	2.78%	$2,195.00	2.20%	$12,195.00	2.44%
Married Couple	$1,390.00	5.56%	$1,390.00	2.78%	$2,025.00	2.03%	$12,025.00	2.41%
Married with One Dependent	$1,737.50	6.95%	$1,737.50	3.48%	$2,025.00	2.03%	$12,025.00	2.41%
Married with Two or more Dependents	$2,085.00	8.34%	$2,085.00	4.17%	$2,085.00	2.09%	$12,025.00	2.41%

First, we can see that this is a big 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 (not shown) 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 taxA regressive tax is one where the average tax burden decreases with income. Low-income taxpayers pay a disproportionate share of the tax burden, while middle- and high-income taxpayers shoulder a relatively small tax burden. . 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 CBO in 2010 estimated that 3.9 million people would pay the tax in 2016, and the vast majority would be low- and middle-income households (76 percent would earn less than 500 percent of the federal poverty level, or about $120,000 for a family of four).^[6] Recall that this was before the Supreme Court’s decision to allow states to opt out of Medicaid expansion, so depending on how states react, we can expect a larger number of low- and middle-income households to pay the tax. The American Action Forum estimates that if only six states choose to opt out of Medicaid expansion this would reduce Medicaid enrollees by about 4.4 million. Of those, 3.2 million would choose to purchase private insurance through exchanges, leaving 1.2 million who would potentially be subject to the tax, which is in addition to the 3.9 million estimated by the CBO.[7] Finally, the CBO has just re-estimated the effects given the Supreme Court ruling, finding that there would be 6 million fewer enrollees in Medicaid as a result of the ruling and half of those would choose to purchase private insurance. That leaves 3 million people potentially subject to the tax, in addition to the 3.9 million earlier estimated. However, the CBO argues that few of them would actually pay the tax, due to low-income exemptions.[8]

The CBO estimates that by 2016 about half of the roughly 55 million currently uninsured will gain insurance either through Medicaid or private insurance exchanges. As such, ACA represents, in the main, a massive transfer of wealth from the uninsured, who are largely low- and middle-income earners, to insurance companies and the larger healthcare industry. It is hard to predict how the healthcare industry will respond in terms of quality. It also means healthcare usage will likely increase, since insurance reduces the out-of-pocket expense of healthcare. The Centers for Medicare and Medicaid Services predict that healthcare expenditures as a share of GDP will climb from 17.8 percent in 2013 to 19.6 percent in 2021.[9] That is double what any other country spends on healthcare.[10]

However, many may chose to remain uninsured, and the resulting mandate tax will produce a number of unintended consequences and detrimental effects. First, there is the unknown administrative and compliance costs of asking the IRS, a revenue agency, to verify the purchase of health insurance. Second, economic distortions will abound. For instance, low-income taxpayers will have an incentive to get under the filing threshold. For a family of four, that threshold is $19,000, meaning that earning even $1 above that will incur a tax of $2,085. For high-income earners, the mandate amounts to an additional income tax of 2 to 4 percent. This could cause many to reduce their earnings either by shielding it in various ways or by working less. In the extreme, it could cause many high-income earners to move to low-tax, low-healthcare-cost countries, such as Singapore.^[11]

Conclusion

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.”^[12] This view is not supported by the numbers. 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. As a result, it is estimated that 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. The uninsured would certainly have an incentive to reduce their income, either by working less or finding and creating tax shelters.

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