Key Elements of the U.S. Tax System

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.

To increase health insurance coverage, the ACA provided individuals and small employers with a tax credit to purchase insurance and imposed taxes on individuals with inadequate 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 excise taxes on health insurers, pharmaceutical companies, and manufacturers of medical devices; raised taxes on high-income families; and in-creased limits on the income tax deduction for medical expenses.

ACA tax provisions in effect in 2019 (table 1) include the following:

• A refundable tax credit for families to purchase health insurance through state and federal marketplaces. 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 cost $53 billion in fiscal year 2019 and 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 cost less than $1 billion in 2019.
• A tax on employers offering inadequate health insurance coverage (the “employer mandate”). The tax applies to employers with 50 or more full-time equivalent employees. Employer mandate receipts were $8 billion in fiscal year 2019.
• Excise taxes on health insurance providers, pharmaceutical manufacturers and importers, and medical device manufacturers and importers. Legislation passed in early 2018 suspended the medical device tax for 2018 and 2019 and suspended the health in-surer tax for 2019. Subsequent legislation passed in late 2019 permanently repealed the medical device tax starting in 2020 and the health-insurer tax starting in 2021. Excise taxes on the health care industry raised $12 billion in 2019.
• An additional 0.9 percent Medicare tax on earnings and a 3.8 percent tax on net in-vestment income (NII) for individuals with incomes exceeding $200,000 and couples with incomes exceeding $250,000. The additional Medicare tax raised $10 billion and the NII tax raised $31 billion in 2019. Nearly all families affected by the additional Medicare tax and NII tax are in the top 5 percent of income, with most of the burden borne by families in the top 1 percent of income.

Additionally, these ACA tax provisions are scheduled to take effect in the future:

• 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. The ACA increased the threshold to 10 percent of income, and later legislation temporarily lowered the limit back to 7.5 percent until 2021, when the threshold is scheduled to in-crease to 10 percent.

Finally, these ACA provisions have been permanently repealed:

• A tax on individuals without adequate health insurance coverage (the “individual mandate”). Many individuals were exempt from the tax, including those with incomes low enough that they were not required to file a tax return, those whose premiums would exceed a specified percentage of income, and unauthorized immigrants. The 2017 Tax Cuts and Jobs Act eliminated the individual mandate starting in 2019. Individual mandate receipts were $4 billion in 2018.
• An excise tax on employer-sponsored health benefits whose value exceeds specified thresholds (the “Cadillac tax”). Including the impact on income and payroll taxes, the tax on high-cost health plans was projected to raise $8 billion in 2022 with the revenue gain growing rapidly over time, reaching $39 billion by 2028. The Cadillac tax would have reduced after-tax incomes the most in percentage terms for middle-income families. However, the Cadillac tax was repealed by the Further Consolidated Appropriations Act of 2020.

Tax changes were an important component of the package of reforms enacted by the ACA. Any major change to the ACA would require making tax policy decisions with implications for health insurance coverage, the budget deficit, and the distribution of after-tax income.