There has been no shortage of attention focused on the scheduled expiration of tax cuts for middle class and wealthy Americans at the end of this year. That’s likely to continue to be the case through the election and a potential lame duck session of Congress following it.
Yet there’s been surprisingly little discussion of the details of the substantial middle class tax break built into the Affordable Care Act (ACA).
To review, there are 2 primary ways that the ACA reduces the number of people who are uninsured. First, starting in 2014, people with income up to138% of the poverty level (now $31 809 a year for a family of 4) become eligible for Medicaid. (This provision became voluntary for states under the recent Supreme Court decision, as described in the JAMA Forum.)
Second, those without health insurance coverage through an employer, Medicaid, or Medicare and who have incomes between 1 and 4 times the poverty level (up to $92 200 for family of 4) are eligible to buy coverage through a new health insurance exchange and get a federal tax credit to help pay their premiums.
The tax credit varies with income and a variety of other factors (such as family size, age, and cost of coverage in a geographic region) that affect how much people have to pay for health insurance. An example may help illustrate how significant these tax credits will be.
Consider a middle class family of 4 with income of $75 000 (roughly the national median for families of that size). The 40-year-old mother is self-employed and her husband of the same age stays at home and takes care of the kids. They live in an area with average health care costs and are now buying health insurance that costs $12 000 a year, which is a typical amount for a family policy in the nongroup market.
Starting in 2014, this family could buy insurance through a health insurance exchange—set up by its state or by the federal government if the state fails to act—and would be eligible for a federal tax credit of about $5000.
A calculator we developed at the Kaiser Family Foundation illustrates how the credit is calculated for people in different circumstances. For example, if that same family were young parents—age 30 rather than 40 years—the tax credit would decrease to about $3000, reflecting the fact that insurance premiums will vary with age. Or if the family instead had income of $40 000, the tax credit would increase to more than $10 000.
A couple other examples can put these amounts into perspective: a typical middle class family has about $2200 at stake in whether or not the income tax cuts expire at the end of this year (see here and here). In addition, I calculate, based on figures from the Congressional Joint Committee on Taxation, the average tax benefit for families with income between $75 000 and $100 000 claiming a deduction for mortgage interest in 2010 was $1466.
The Congressional Budget Office (CBO) estimates that more than 20 million people annually will receive the health insurance tax credits by 2017. Who are these people? They are mostly employees (and their families) who work for employers who do not offer health benefits. Or they are self-employed and buying coverage on their own.
Of course, tax credits of that size going to that many people do not come cheap. The CBO projects that subsidies in exchanges will cost the federal government more than $150 billion per year a decade from now. This could very well make them a target for cuts as Congress debates a host of budget issues by the end of this year, including the scheduled expiration of tax cuts for middle class and wealthy Americans, reconsideration of automatic spending cuts scheduled to take effect the beginning of next year, and a reduction in physician fees under Medicare that is poised to occur if Congress does not stop it.
Interestingly, tax subsidies for the purchase of individual health insurance have long been central to Republican health reform plans, included in proposals from both Bush administrations and from 2008 Republican presidential candidate John McCain. Mitt Romney also seems to support the concept, proposing to “end tax discrimination against the individual purchase of insurance.”
To be sure, Republican proposals have not generally included health insurance tax credits as generous as those in the ACA. The ACA includes other provisions that have provoked opposition from conservatives who see them as creating too big a role for government, such as requiring insurers to accept everyone and charge the same premium regardless of their health status, creating insurance exchanges, requiring most Americans to buy insurance, and expanding Medicaid.
But like the tax cuts for the middle class that are the subject of intense political interest right now, if the health insurance tax credits go into effect in 2014 as planned, they may prove very difficult to repeal.
About the author: Larry Levitt, MPP, is Senior Vice President for Special Initiatives at the Kaiser Family Foundation and Senior Advisor to the President of the Foundation. Among other duties, he is Co-Executive Director of the Kaiser Initiative on Health Reform and Private Insurance.
About The JAMA Forum: To provide ongoing coverage throughout this election year, JAMA has assembled a team of leading scholars, including health economists, health policy experts, and legal scholars, to provide insight about the political aspects of health care. Each JAMA Forum entry expresses the opinions of the author but does not necessarily reflect the views or opinions of JAMA, the editorial staff, or the American Medical Association. More information is available here and here.
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