The voices of Tax Policy Center's researchers and staff
The Affordable Care Act’s tax on those who choose not to buy health insurance was the linchpin of the Supreme Court’s decision to uphold the law’s constitutionality. But in reality, the tax (nee penalty) is a mouse.
The tax itself is modest, at least to start. It will affect relatively few people. And it will be almost impossible for the IRS to make anybody pay it.
The Urban Institute’s Health Policy Center estimates that if the law were in effect today, only about 7 percent of the non-elderly, or about 18 million people, would be faced with the choice: Get insurance or pay the tax. To put it another way, 93 percent, or 250 million, would not—either because they already have insurance or because the ACA explicitly exempts them from the levy.
But that doesn’t mean that 18 million will owe the tax. Many will buy insurance rather than pay the fee. About 11 million, or about 60 percent of those subject to the tax, will be eligible for government subsidies to buy their own coverage.
For some, that help will still not be enough to make insurance affordable. And about 3 percent of those under 65—or about 7 million individuals--will have to acquire insurance and pay the full cost. Many in those two groups may choose the tax rather than insurance.
Keep in mind these estimates are subject to much uncertainty. For instance, some employees will lose their employer-sponsored health insurance as a result of the ACA while others will get new coverage. Sorting that out is challenging, but Urban’s projection is consistent with others.
Then, there is the amount of the tax. In 2014 the initial levy will be just $95. By 2016, it is scheduled to increase to $695 or 2.5 percent of taxable income—up to a maximum of $2,085 (indexed for inflation in subsequent years). It will increase, that is, if Congress does not slow the phase-in. And I’ve got a funny feeling about that.
Overall, the congressional Joint Committee on Taxation estimates the tax would generate about $54 billion over eight years (assuming the tax rises as scheduled). Not nuthin’ but pretty modest as these things go.
Finally, there is the issue of whether the IRS can collect the tax if someone refuses to either buy insurance or pay the fine. The ACA says the IRS should enforce the law by imposing a tax penalty—but then effectively blocks the agency from using most of the tools it normally uses to go after tax scofflaws.
The ACA bars the IRS from bringing a criminal enforcement case against someone who refuses to pay the non-insurance penalty. And it makes it very difficult, if not impossible, for it to enforce a tax lien. Law professors Jordan Barry and Bryan Camp have a nice piece in Tax Notes explaining it all.
That leaves only one tool—the IRS can subtract the penalty from any refund it owes a taxpayer. But that applies only if the IRS happens to owe somebody a refund. These days, two-thirds of taxpayers get one, but it is usually their choice.
Only low-income households who receive refundable credits, such as the Earned Income Credit, always get refunds. But the ACA specifically exempts most of them from the tax because their income is so low.
Bottom line: Notwithstanding the nutty Internet rumors that the IRS is hiring 20,000 revenue agents to collect the tax, most people who really want to game the system will probably get away with it.
Of course, this creates a big problem. The law requires insurance companies to sell to all comers regardless of pre-existing medical conditions. But if the tax fails to encourage healthy people to buy right away and not wait until they need coverage, the rest of us will end up paying higher insurance premiums as a result.
And that’s the trouble with this entire mechanism. The Supreme Court calls it a tax. President Obama and Mitt Romney’s chief spokesman insist it is a penalty. But here’s a better label—inadequate.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.