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The Tax Policy Center's

Briefing Book

A citizen’s guide to the fascinating (though often complex) elements of the US tax system.

Tax Policy Center Briefing Book

Key Elements of the U.S. Tax System

  • Briefing Book
  • Taxes and Health Care
  • What tax changes did the Affordable Care Act make?
  • Chapters
    • Introduction
      • Introduction
        • Introduction
    • Some Background
      • Federal Budget
        • What are the sources of revenue for the federal government?
        • How does the federal government spend its money?
        • What is the breakdown of revenues among federal, state, and local governments?
        • How do US taxes compare internationally?
      • Federal Budget Process
        • How does the federal budget process work?
        • What is the history of the federal budget process?
        • What is the schedule for the federal budget process?
        • What is reconciliation?
        • How is a budget resolution enforced?
        • What is PAYGO?
        • What are rescissions?
      • Federal Budget Outlook
        • How accurate are long-run budget projections?
        • What have budget trends been over the short and long term?
        • How much spending is uncontrollable?
        • What are tax extenders?
        • What options would increase federal revenues?
        • What does it mean for a government program to be off-budget?
        • How did the TCJA affect the federal budget outlook?
      • Taxes and the Economy
        • How do taxes affect the economy in the short run?
        • How do taxes affect the economy in the long run?
        • What are dynamic scoring and dynamic analysis?
        • Do tax cuts pay for themselves?
        • On what do economists agree and disagree about the effects of taxes on economic growth?
        • What are the economic effects of the Tax Cuts and Jobs Act?
      • Economic Stimulus
        • What is the role of monetary policy in alleviating economic downturns?
        • What are automatic stabilizers and how do they work?
        • What characteristics make fiscal stimulus most effective?
      • Distribution of Tax Burdens
        • How are federal taxes distributed?
        • Are federal taxes progressive?
        • How should progressivity be measured?
        • What is the difference between marginal and average tax rates?
        • What criticisms are levied against standard distributional analysis?
        • How should distributional tables be interpreted?
        • Who bears the burden of the corporate income tax?
        • Who bears the burden of federal excise taxes?
        • How do financing methods affect the distributional analyses of tax cuts?
        • How do taxes affect income inequality?
      • Tax Expenditures
        • What are tax expenditures and how are they structured?
        • What is the tax expenditure budget?
        • Why are tax expenditures controversial?
        • What are the largest tax expenditures?
        • How did the TCJA affect tax expenditures?
      • Tax Gap and Tax Shelters
        • What is the tax gap?
        • What does the IRS do and how can it be improved?
        • What is a tax shelter?
      • Recent History of the Tax Code
        • What did the 2008–10 tax stimulus acts do?
        • What did the American Taxpayer Relief Act of 2012 do?
        • How did the Tax Cuts and Jobs Act change personal taxes?
        • How did the Tax Cuts and Jobs Act change business taxes?
    • Key Elements of the U.S. Tax System
      • Individual Income Tax
        • What is the standard deduction?
        • What are itemized deductions and who claims them?
        • How did the TCJA change the standard deduction and itemized deductions?
        • What are personal exemptions?
        • How do federal income tax rates work?
        • What are tax credits and how do they differ from tax deductions?
        • How do phaseouts of tax provisions affect taxpayers?
      • Capital Gains and Dividends
        • How are capital gains taxed?
        • What is the effect of a lower tax rate for capital gains?
        • What is carried interest, and how is it taxed?
        • How might the taxation of capital gains be improved?
      • AMT
        • What is the AMT?
        • Who pays the AMT?
        • How much revenue does the AMT raise?
        • How did the TCJA change the AMT?
      • Taxes and the Family
        • What is the child tax credit?
        • What is the adoption tax credit?
        • What is the earned income tax credit?
        • Do all people eligible for the EITC participate?
        • How does the tax system subsidize child care expenses?
        • What are marriage penalties and bonuses?
        • How did the TCJA change taxes of families with children?
      • Taxes and the Poor
        • How does the federal tax system affect low-income households?
        • What is the difference between refundable and nonrefundable credits?
        • Can poor families benefit from the child tax credit?
        • Why do low-income families use tax preparers?
        • How does the earned income tax credit affect poor families?
        • What are error rates for refundable credits and what causes them?
        • How do IRS audits affect low-income families?
      • Taxes and Retirement Saving
        • What kinds of tax-favored retirement arrangements are there?
        • How large are the tax expenditures for retirement saving?
        • What are defined benefit retirement plans?
        • What are defined contribution retirement plans?
        • What types of nonemployer-sponsored retirement savings accounts are available?
        • What are Roth individual retirement accounts?
        • Who uses individual retirement accounts?
        • How does the availability of tax-favored retirement saving affect national saving?
        • What’s the difference between front-loaded and back-loaded retirement accounts?
        • What is an automatic 401(k)?
        • How might low- and middle-income households be encouraged to save?
      • Taxes and Charitable Giving
        • What is the tax treatment of charitable contributions?
        • What entities are tax-exempt?
        • Who benefits from the deduction for charitable contributions?
        • How would various proposals affect incentives for charitable giving?
        • How large are individual income tax incentives for charitable giving?
        • How did the TCJA affect incentives for charitable giving?
      • Taxes and Health Care
        • How much does the federal government spend on health care?
        • Who has health insurance coverage?
        • Which tax provisions subsidize the cost of health care?
        • How does the tax exclusion for employer-sponsored health insurance work?
        • What are premium tax credits?
        • What tax changes did the Affordable Care Act make?
        • How do health savings accounts work?
        • How do flexible spending accounts for health care expenses work?
        • What are health reimbursement arrangements and how do they work?
        • How might the tax exclusion for employer-sponsored health insurance (ESI) be reformed?
      • Taxes and Homeownership
        • What are the tax benefits of homeownership?
        • Do existing tax incentives increase homeownership?
      • Taxes and Education
        • What tax incentives exist for higher education?
        • What tax incentives exist to help families pay for college?
        • What tax incentives exist to help families save for education expenses?
        • What is the tax treatment of college and university endowments?
      • Tax Complexity
        • Why are taxes so complicated?
        • What are the benefits of simpler taxes?
        • What policy reforms could simplify the tax code?
      • Wealth Transfer Taxes
        • How do the estate, gift, and generation-skipping transfer taxes work?
        • Who pays the estate tax?
        • How many people pay the estate tax?
        • What is the difference between carryover basis and a step-up in basis?
        • How could we reform the estate tax?
        • What are the options for taxing wealth transfers?
        • What is an inheritance tax?
      • Payroll Taxes
        • What are the major federal payroll taxes, and how much money do they raise?
        • What is the unemployment insurance trust fund, and how is it financed?
        • What are the Social Security trust funds, and how are they financed?
        • Are the Social Security trust funds real?
        • What is the Medicare trust fund, and how is it financed?
      • Excise Taxes
        • What are the major federal excise taxes, and how much money do they raise?
        • What is the Highway Trust Fund, and how is it financed?
      • Energy and Environmental Taxes
        • What tax incentives encourage energy production from fossil fuels?
        • What tax incentives encourage alternatives to fossil fuels?
        • What is a carbon tax?
      • Business Taxes
        • How does the corporate income tax work?
        • What are pass-through businesses?
        • How are pass-through businesses taxed?
        • Is corporate income double-taxed?
      • Tax Incentives for Economic Development
        • What is the new markets tax credit, and how does it work?
        • What is the Low-Income Housing Tax Credit and how does it work?
        • What are Opportunity Zones and how do they work?
      • Taxes and Multinational Corporations
        • How does the current system of international taxation work?
        • How do US corporate income tax rates and revenues compare with other countries’?
        • What are the consequences of the new US international tax system?
        • How does the tax system affect US competitiveness?
        • How would formulary apportionment work?
        • What are inversions, and how will TCJA affect them?
        • What is a territorial tax and does the United States have one now?
        • What is the TCJA repatriation tax and how does it work?
        • What is the TCJA base erosion and anti-abuse tax and how does it work?
        • What is global intangible low-taxed income and how is it taxed under the TCJA?
        • What is foreign-derived intangible income and how is it taxed under the TCJA?
    • How Could We Improve the Federal Tax System?
      • Comprehensive Tax Reform
        • What is comprehensive tax reform?
        • What are the major options for comprehensive tax reform?
      • Broad-Based Income Tax
        • What is a broad-based income tax?
        • What would and would not be taxed under a broad-based income tax?
        • What would the tax rate be under a broad-based income tax?
      • National Retail Sales Tax
        • What is a national retail sales tax?
        • What would and would not be taxed under a national retail sales tax?
        • What would the tax rate be under a national retail sales tax?
        • What is the difference between a tax-exclusive and tax-inclusive sales tax rate?
        • Who bears the burden of a national retail sales tax?
        • Would tax evasion and avoidance be a significant problem for a national retail sales tax?
        • What would be the effect of a national retail sales tax on economic growth?
        • What transition rules would be needed for a national retail sales tax?
        • Would a national retail sales tax simplify the tax code?
        • What can state and local sales taxes tell us about a national retail sales tax?
        • What is the experience of other countries with national retail sales taxes?
        • What did the President’s Advisory Panel on Federal Tax Reform say about the national retail sales tax?
      • Value Added Tax (VAT)
        • What is a VAT?
        • How would a VAT be collected?
        • What would and would not be taxed under a VAT?
        • What would the tax rate be under a VAT?
        • What is the difference between zero rating and exempting a good in the VAT?
        • Who would bear the burden of a VAT?
        • Is the VAT a money machine?
        • How would small businesses be treated under a VAT?
        • What is the Canadian experience with a VAT?
        • Why is the VAT administratively superior to a retail sales tax?
        • What is the history of the VAT?
        • How are different consumption taxes related?
      • Other Comprehensive Tax Reforms
        • What is the flat tax?
        • What is the X-tax?
      • Recent Comprehensive Tax Reform Proposals
        • Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, Report of the President’s Advisory Panel on Federal Tax Reform, November 2005
        • The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, December 2010
        • Debt Reduction Task Force, “Restoring America’s Future,” Bipartisan Policy Center, November 2010
        • The Tax Reform Act of 2014: Fixing Our Broken Tax Code So That It Works for American Families and Job Creators, House Ways and Means Committee
        • The Graetz Competitive Tax Plan, Updated for 2015
      • Return-Free Tax Filing
        • What is return-free filing and how would it work?
        • What are the benefits of return-free filing?
        • What are the drawbacks of return-free filing?
        • How would the tax system need to change with return-free filing?
        • Who would qualify for return-free filing?
        • Would return-free filing raise taxes?
        • What was the experience with return-free filing in California?
        • What other countries use return-free filing?
    • The State of State (and Local) Tax Policy
      • State and Local Revenues
        • What are the sources of revenue for state governments?
        • What are the sources of revenue for local governments?
      • Specific State and Local Taxes
        • How do state and local individual income taxes work?
        • How do state and local sales taxes work?
        • How do state and local property taxes work?
        • How do state and local corporate income taxes work?
        • How do state estate and inheritance taxes work?
        • How do state earned income tax credits work?
        • How do state and local severance taxes work?
        • How do state and local soda taxes work?
        • How do marijuana taxes work?
      • Fiscal Federalism and Fiscal Institutions
        • How does the deduction for state and local taxes work?
        • What are municipal bonds and how are they used?
        • What types of federal grants are made to state and local governments and how do they work?
        • What are state rainy day funds, and how do they work?
        • What are tax and expenditure limits?
        • What are state balanced budget requirements and how do they work?
    • Glossary
      • Glossary
        • Glossary

What tax changes did the Affordable Care Act make?

Taxes and Health Care

<6/10>
Individual Taxes
Q.

What tax changes did the Affordable Care Act make?

A.

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.

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.

Data Sources

Congressional Budget Office. 2020a. “Federal Subsidies for Health Insurance Coverage for People under Age 65: 2019 to 2029.” Washington, DC: Congressional Budget Office.

———. 2019b. “Revenue Projections, by Category.” Supplemental tables to The Budget and Economic Outlook: 2020 to 2030. Washington, DC: Congressional Budget Office.

Urban-Brookings Tax Policy Center. “Microsimulation Model, version 0319-2”

———. Table T19-0136. “Tax Benefit of the Premium Tax Credit, by Expanded Cash Income Percentile, 2020”; Table T16-0302. “Repeal 0.9 Percent Additional Medicare Tax by Expanded Cash Income Percentile, 2017”; Table T16-0308. “Repeal Certain ACA Excise Taxes by Expanded Cash Income Percentile, 2025”; Table T18-0191. “Tax Benefit of the Net Investment Income Tax, Baseline: Current Law, Distribution of Federal Tax Change by Expanded Cash Income Percentile, 2018”; Table T18-0217. “Repeal Cadillac Tax, Premiums Revert to Pre-Cadillac Tax Levels, Baseline: Current Law, Distribution of Federal Tax Change by Expanded Cash Income Percentile, 2028”.

Further Reading

Blumberg, Linda J., and Lisa Clemans-Cope. 2009. “Health Savings Accounts and High-Deductible Health Insurance Plans: Implications for Those with High Medical Costs, Low Incomes, and the Uninsured.” Washington, DC: Urban Institute.

Helmchen, Lorens A., David W. Brown, Ithai Z. Lurie, and Anthony T. Lo Sasso. 2015. “Health Savings Accounts: Growth Concentrated among High-Income Households and Large Employers.” Health Affairs 34 (9): 1594–98.

Internal Revenue Service. 2017. “Revenue Procedure 2016-28.” Washington, DC: Internal Revenue Service.

Joint Committee on Taxation. 2008. “Tax Expenditures for Health Care.” JCX-66-08. Washington, DC: Joint Committee on Taxation.

Rapaport, Carol. 2013. “Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison, 2013.” CSR Report RS21573. Washington, DC: Congressional Research Service.

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