Thursday, September 22, 2016

Tax Code Carrots and Sticks for Health Insurance: An Update

The Patient Protection and Affordable Care Act of 2010 added two provisions to the individual income tax: a tax credit for those with low income levels who are purchasing health insurance, and a penalty for those who have not purchased health insurance. How many tax returns are actually including these provisions? The mid-year report of the Office of the Taxpayer Advocate, released in July, offers some information in Chapter II, "Review of the 2016 Filing Season," as well

The Premium Tax Credit is the carrot for buying health insurance. As the report notes: "The PTC is a refundable tax credit paid either in advance or at return filing to help taxpayers with low to moderate incomes purchase health insurance through the Marketplace." For the 2015 tax year returns filed in 2016, 4.8 million returns claimed the Premium Tax Credit, and for this group the total value of the ax credit was $14.3 billion. Over 90% of those returns also asked for the Advanced PTC, as pre-payment for the similar costs expected in 2016.

The Individual Shared Responsibility Payment is the stick. As the report writes: "Taxpayers are required to report that they have “minimum essential coverage” or were exempt from the responsibility to have the required coverage. If the taxpayer did not have coverage and was not exempt, he or she was required to make an ISRP when filing a return." A total of 5.6 million returns includes the ISRP provision, and those returns paid an average ISRP of $442, which works out to about $2.5 billion in total.

The report also evaluates how well the IRS has implemented these provisions, with the overall tone reflected in Chapter III, Area of Focus #9, "As the IRS Has Gained Experience in Administering theIndividual Provisions of the Affordable Care Act, It HasAddressed Some Previous Concerns But a Few Still Remain."

Although the PTC and the ISRP often seem to have received a lion's share of the controversy, it's worth remembering that they are neither the most costly portion of the tax code affecting health insurance nor the most costly part of the Patient Protection and Affordable Care Act of 2010. Back in March, the Congressional Budget Office published a report on "Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2016 to 2026," and I wrote a post here about the "Affordable Care Act: Costs of Expanding Coverage" (March 28, 2016).

As CBO points out, by far the biggest tax provision affecting health insurance coverage is the tax exclusion for employer-provided health insurance--that is, when your employer pays for your health insurance, the value of those payments is not taxed as income. If those payments were taxed as income, CBO estimates that it would raise $266 billion in tax revenue in 2016. In contrast, the Premium Tax Credit providing a subsidy for low-income people to purchase health insurance looks relatively small.

Also the biggest additional cost of the Patient Protection and Affordable Care Act of 2010 is not the Premium Tax Credit, but rather is the expansion of Medicaid coverage to more people, which CBO estimates raised the costs of Medicaid by $64 billion in 2016. Overall, the CBO reported that for the Patient Protection and Affordable Care Act of 2010: "In 2016, those provisions are estimated to reduce the number of uninsured people by 22 million and to result in a net cost to the federal government of $110 billion." As I noted in that earlier post: "If the fundamental goal of the act was to spend an extra $110 billion and subsidize insurance for 22 million more Americans, the law could have been a lot simpler and less invasive."