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Obamacare Subsidies Are Not a Free Lunch

Posted By Brian Blase On October 28, 2010 @ 12:00 pm In Obamacare | Comments Disabled

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Families USA is out with a new report, Lower Taxes, Lower Premiums: The New Health Insurance Tax Credit [2], which lauds the health insurance tax credits (subsidies) in Obamacare. But the report tells only half of the story.

It is true that the tax credits will reduce the effective premium that many households will face for health insurance coverage. However, the key question from a policy perspective is whether the benefits of the Obamacare tax credits outweigh their costs. Since the Families USA report failed to list any of the costs or concerns of the Obamacare tax credits, Heritage will fill the void.

First, the tax credits are going to be enormously expensive. The Congressional Budget Office (CBO) estimated that the average subsidy per subsidized enrollee will be between $5,200 and $6,000 [3]. Subsidies have to be paid for with revenue generated through taxes. So the gross benefit is exactly offset by the gross cost of the tax credit paid by federal taxpayers (all else being equal). According to the Families USA report, the total cost of the tax credits will be $110 billion in 2014 alone. All else is not equal, however. The tax credits will be financed not only by higher taxes paid by many millions of households but also through substantial Medicare cuts and net revenue from the CLASS Act scheme [4].

Second, the tax credits can be used only to purchase government-approved health plans. Since the insurance packages offered through the state exchanges have significant limits on cost-sharing, the demand for health care services will increase. The increased demand will put upward pressure on prices, and as a result health insurance premiums will probably rise.

Third, the tax credits produce enormous inequities in compensation depending on whether the worker has employer-sponsored insurance (ESI). Former CBO Director Douglas Holtz-Eakin has shown that individuals under 250 percent of the federal poverty level (FPL) who receive health insurance through work are at a substantial disadvantage [5] relative to otherwise identical individuals who would qualify for subsidies through the exchange. This is because an employer who does not offer health coverage will be able to increase the wages of his workforce with his employees receiving favorable tax treatment to purchase insurance in the exchanges. On net, therefore, individuals below 250 percent of FPL will receive greater net compensation if not offered ESI and instead purchase heavily subsidized coverage in the exchange.

Fourth, the tax credits create an enormous “cliff” effect at 400 percent of FPL. Once a household earns above 400 percent FPL, it becomes ineligible for any subsidies. The high marginal tax rate at 400 percent of FPL will discourage work as income approaches the upper limit as one grows older, incentivizing individuals to retire early or to change the way they report income. This particular subsidy structure further penalizes upward income mobility for middle-class individuals.

The tax treatment of health care and health insurance is complicated, but the new law does not get it right. The Obamacare subsidies increase taxes for those not receiving the subsidies, require the purchase of government-approved plans, create new inequities in the tax code, and penalize work.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/10/28/obamacare-subsidies-are-not-a-free-lunch/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/free-lunch.jpg

[2] Lower Taxes, Lower Premiums: The New Health Insurance Tax Credit: http://www.familiesusa.org/assets/pdfs/health-reform/Premium-Tax-Credits.pdf

[3] average subsidy per subsidized enrollee will be between $5,200 and $6,000: http://www.cbo.gov/ftpdocs/113xx/doc11379/AmendReconProp.pdf

[4] CLASS Act scheme: http://thf_media.s3.amazonaws.com/2010/pdf/bg2441.pdf

[5] at a substantial disadvantage: http://americanactionforum.org/files/LaborMktsHCRAAF5-27-10.pdf

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