What tax changes did the Affordable Care Act make?
The Affordable Care Act made several changes to the tax code intended to increase health insurance coverage, reduce health care costs, and finance health care reform.
The Affordable Care Act (ACA) made several changes to the tax code intended to increase health insurance coverage, reduce health care costs, and finance health care reform. On net these taxes and credits are projected to reduce the deficit by $46 billion in 2020. Taken together, they increase the average tax burden significantly for families in the top one percent of the income distribution but benefit families in the bottom income quintiles by providing new credits that on average exceed new taxes for those families. Combined with the ACA’s Medicaid expansion, the coverage-related taxes are projected to reduce the number of uninsured by 23 million in 2020.
To increase health insurance coverage, the ACA provided a tax credit for individuals and small employers to purchase insurance and imposed excise taxes on individuals without adequate coverage and on employers who do not offer adequate coverage. To reduce health care costs and raise revenue for insurance expansion, the ACA imposed an excise tax on high-cost health plans. To raise additional revenue for reform, the ACA imposed surtaxes on high-income families; excise taxes on health insurers, pharmaceutical companies, and manufacturers of medical devices; and increased limits on the income tax deduction for medical expenses.
ACA tax provisions include the following :
- A refundable tax credit for families to purchase health insurance through state and federal exchanges. Tax filers must have incomes between 100 and 400 percent of the federal poverty level, be ineligible for health coverage from other sources, and be legal residents of the United States. The Premium Tax Credit (PTC) is projected to cost $36 billion in 2020 (table 1). The PTC primarily benefits low- and moderate-income families.
- A tax credit for small employers to purchase health insurance for their workers. Employers must have fewer than 25 workers whose average wages are less than $50,000. Employers can only receive the credit for up to two years. The small-employer health insurance credit is projected to cost $1 billion in 2020.
- An excise tax on individuals without adequate health insurance coverage. Many individuals are exempt from the excise tax, including those with incomes low enough that they are not required to file a tax return, those whose premiums would exceed a specified percentage of income, and unauthorized immigrants. The excise tax is projected to raise $3 billion in 2020.
- An excise tax on employers offering inadequate health insurance coverage. The tax applies to employers with 50 or more full-time equivalent employees. The excise tax is projected to raise $20 billion in 2020. The excise taxes on individuals without adequate health insurance coverage and employers offering inadequate health insurance coverage disproportionately affects low- and moderate-income families who are more likely to lack health insurance and/or work for employers not offering coverage.
- An excise tax on employer-sponsored health benefits whose value exceeds specified thresholds starting in 2020. Because the thresholds are only indexed to price inflation more plans will be affected over time if, as likely, health care costs grow faster than prices for other goods and services. The excise tax on high-cost health plans is projected to raise $3 billion in 2020 with the revenue gain growing rapidly over time, reaching $20 billion by 2026. The so called “Cadillac” tax reduces after-tax incomes the most in percentage terms for middle-income families.
- Excise taxes on health insurance providers, pharmaceutical manufacturers and importers, and medical device manufacturers and importers. These excise taxes are projected to raise $19 billion in 2020. These excise taxes have a similar percentage impact on after-tax incomes for families across the income distribution.
- An additional 0.9 percent payroll tax on earnings and a 3.8 percent tax on net investment income (NII) for individuals with incomes exceeding $200,000 and couples with incomes exceeding $250,000. The high-income surtaxes are projected to raise $35 billion in 2020. Nearly all families affected by the additional payroll tax and NII tax are in the top five percent of income with most of the burden borne by families in the top one percent of income.
- An additional limit on the medical expense deduction. Pre-ACA, taxpayers could deduct medical expenses exceeding 7.5 percent of income when calculating taxable income. Post-ACA, only medical expenses exceeding 10 percent of income can be deducted. This additional limit is projected to increase income tax revenue by $3 billion in 2020. The provision has the largest relative impact on after-tax income for families in the fourth income quintile.
Taken together the ACA taxes and credits are projected to reduce the budget deficit by $46 billion in 2020. The ACA’s revenue raisers more than cover the cost of the PTC and small employer health insurance credit and pay for a portion of expanded Medicaid, projected to be $91 billion in 2020. The ACA, which was scored by the Congressional Budget Office to reduce the budget deficit, primarily paid for the remaining Medicaid costs by reducing Medicare payments to providers and Medicare Advantage Plans.
On net, the ACA significantly increased average taxes on families in the top one percent of income, cut taxes on families in the bottom quintiles, and modestly increased taxes on the rest of families. Repealing the ACA taxes in 2025 would provide an average tax cut of $46,000 to families in the top one percent, increasing their after-tax incomes by more than 2 percent (table 2). In contrast, average taxes for families in the bottom and second quintiles would increase by $90 and $170, respectively, reducing their after-tax incomes by at least .4 percent (table 3). Families in the middle quintile would receive an average tax cut of $240, increasing their after-tax incomes by .3 percent.
While repealing the ACA taxes would hurt families in the bottom two quintiles on average, the story is more complicated. For the 6 percent of families in the bottom quintiles with Premium Tax Credits, repealing the ACA taxes would be a substantial loss, over $5000 (table 4). But most low-income families would receive a modest tax cut of around $250. And tax cuts would be more substantial, about $1500, for the 11 percent of low-income families affected by the coverage-related excise taxes (not shown). 
Tax changes are an important component of the package of reforms enacted by the ACA. Policymakers wishing to repeal or replace the ACA will need to make tax policy decisions with important implications for health insurance coverage, the budget deficit, and the distribution of after-tax income.
 All of the ACA taxes are scheduled to be in effect by 2020.
 See Congressional Budget Office (2016). Blumberg, Buettgens, and Holahan (2016) estimate that repealing the ACA through the budget reconciliation process could reduce coverage by 30 million people, more than undoing the ACA’s coverage expansion. The additional coverage loss would result from the collapse of the non-group health insurance market due to repealing coverage subsidies and coverage-related penalties while keeping in place insurance market reforms, such as guaranteed issue and community rating.
 We assume the burden of the excise tax on employers not offering adequate coverage falls entirely on workers.
 For additional tables on the distribution of ACA taxes see http://www.taxpolicycenter.org/simulations/distribution-affordable-care-....
 Coverage related excise taxes include the excise tax on individuals without adequate health insurance coverage and excise tax on employers offering inadequate health insurance coverage.
Blumberg, Linda J., Matthew Buettgens, and John Holahan, 2016. “Implications of Partial Repeal of the ACA through Reconciliation.” Washington, DC: The Urban Institute.
Congressional Budget Office. 2017. “Federal Subsidies Under the Affordable Care Act for Health Insurance Coverage Related to the Expansion of Medicaid and Nongroup Health Insurance.” Washington, DC: Congressional Budget Office.
Congressional Budget Office. 2016. “Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2016 to 2026.” Report, March. Washington, DC: Congressional Budget Office.
Congressional Budget Office. 2015. “Budgetary and Economic Effects of Repealing the Affordable Care Act.” Report, June 19. Washington, DC: Congressional Budget Office.