Who Really Gets a Tax Increase if the Individual Mandate Goes Away?

The following article by Margaret Sanger-Katz was posted on the New York Times website November 17, 2017:

If Obamacare’s requirement to have health insurance is revoked by Congress, some people will choose to go without it, and the government will save money because it won’t have to pay to subsidize their plans.

Almost everyone agrees on that. But precisely how much the individual mandate matters, and who would really be worse off without it, are trickier questions.

New estimates show that the mandate’s repeal would give low-income Americans a big tax increase. But Republicans say that’s not true. And they have a point. Meanwhile, left out of the tax tables is the fact that some higher earners, who look as if they are getting more of a tax cut, will get hit with higher insurance premiums if the mandate is repealed.

The Congressional Budget Office currently estimates that eliminating Obamacare’s individual mandate will cause 13 million more people to become uninsured, and save the government $338 billion over 10 years. Most Republican lawmakers don’t really believe dropping the mandate would so severely lower the number of insured, a point they argued loudly when they were hoping to repeal Obamacare earlier this year.

After long resisting that idea, the budget office recently signaled that it agrees, and it plans to lower its estimates next year. But for now, Republicans have seized on the unadjusted estimates, because fewer people with government-subsidized insurance means more money to help them finance other parts of their tax overhaul bill.

It looks as if the tax bill rises for some people who drop coverage.

Here’s why: The subsidies Obamacare offers to low- and middle-income Americans who buy their own insurance take the form of refundable tax credits, a kind of government-issued gift card that can be used only to buy health insurance. But if fewer people who qualify for these gift cards choose to buy insurance, the government spends less in tax money for the population that qualifies. The tax scorekeepers count this reduction in tax credits as an increase in tax liability for the group. Individuals would not actually pay more in taxes.

If they don’t buy insurance and don’t get the gift card, is that really the same thing as paying more in taxes? Republicans say it is not.

“Nothing in our mark will impact the availability of premium subsidy credits,” said Senator Orrin Hatch of Utah, the chairman of the Senate Finance Committee, on Thursday, using a technical term for draft legislation. “This is the result of an assumption about economic behavior that is 100 percent voluntary.”

Mr. Hatch has a point. The subsidies may count, technically, as tax benefits, but they are relatively unusual in the tax code, because they can be used only to buy health insurance. People who get insurance can get a gift card. People who don’t get nothing. But if someone chooses not to buy insurance, does that mean they’ve lost out financially?

Some analysts consider those losses real losses, because it appears that some people are spurred to investigate their insurance options because of the mandate, then learn they qualify for free insurance. Without a mandate, they might remain uninsured. (And even some of those who don’t qualify for free insurance might end up better off buying it — people who contract an expensive disease, or get in a serious accident.)

“In my view, those people are definitely better off with coverage than without coverage,” said Aviva Aron-Dine, a senior fellow at the liberal Center on Budget and Policy Priorities. “They’re protected from financial catastrophe. They can get primary and preventive care. And the mandate gave them a nudge.”

But others say that if customers valued health insurance, they would buy it.

“Since the credits go exclusively to pay the premium, it’s a little weird,” said Len Burman, an institute fellow at the Tax Policy Center, a research group that evaluates tax laws.

Another weird thing that Mr. Burman noted is that the more expensive health insurance gets, the bigger a tax increase the change appears to be in the government estimates. Under the Affordable Care Act, people below a certain income cap can’t pay more than a percentage of their income to buy health insurance, so as prices go up, so do their subsidies. Economists think that lifting a requirement for healthy people to buy insurance will tend to make the resulting pool of customers sicker, driving up insurance premiums. But the actual cost of insurance for that group wouldn’t increase.

“The credits look more valuable, because the proposal sabotages the health market, and premiums go up,” he said.

Others will have a tax cut but face much higher premiums.

But if the low-income people who won’t get tax credits aren’t clearly worse off financially — after all, they could claim them again if they choose to buy insurance — there’s another group that is certain to suffer if the mandate goes away. Higher-income people, who don’t qualify for government gift cards, have to pay the full price of health insurance. Single people earning more than about $48,000, or families of four earning more than around $98,000, earn too much to qualify for any insurance subsidies.

The budget office estimates that eliminating the mandate would drive up premiums an average of 10 percent every year beyond their normal rate of increase. Based on this year’s prices, that would mean a price increase of more than $50 a month for a 40-year-old single customer in large sections of Nebraska and North Carolina, even for the very cheapest high-deductible plans on the market. Unsubsidized 40-year-old customers in Alaska, who qualify for credits at slightly higher rates of income, would face increases of more than $70 a month for the least-expensive plan. In the cheapest markets in the country, in Indiana and Texas, premiums would rise for single 40-year-olds by about $19 a month.

Such a premium increase could largely cancel out the tax benefits of the reform bill for many people in that income range who buy their own insurance. A Center on Budget and Policy Priorities analysis of the first draft of the Senate tax bill found that the average family earning between $50,000 and $75,000 would save around $750 on their taxes. Compare that with the $600 premium increase a single customer in Nebraska might face.

Both Susan Collins of Maine and Lisa Murkowski of Alaska, Republican senators whose votes may be needed to pass the tax bill, have expressed some concern about the premium increases for this group as a kind of hidden middle-class tax increase. Those changes may not show up as increases on a government table the way the missing tax credits appear for their lower-income neighbors. But the effect on their bottom line may be more significant.