The True Value of the ACA Taxes

Repealing two taxes on high-income earners would provide a windfall for millionaires and put Medicare and Medicaid at risk.

By Paul N. Van de Water

Tagged Affordable Care ActMedicaidMedicareTaxes

Congressional Republicans are finding it harder than they thought to fulfill their campaign promise to “repeal and replace” the Affordable Care Act (ACA, or “Obamacare”). One sticking point is whether to repeal immediately the taxes that help pay for the law’s coverage expansions. In recent days, two GOP senators have introduced replacement legislation that would retain the taxes, while the chairs of the House and Senate tax-writing committees have reiterated calls to repeal them. The choice is significant for both tax and health policy.

The ACA has managed to bring health coverage to over 20 million more Americans by providing premium tax credits to help purchase private insurance and by expanding Medicaid. This more than pays for these coverage expansions by raising tax revenues and reducing excessive Medicare and Medicaid reimbursements to health-care plans and providers.

Half of the ACA’s new revenues come from two Medicare taxes on high-income taxpayers: an increase in the Hospital Insurance payroll tax from 2.9 percent to 3.8 percent on earnings over $250,000 a year ($200,000 for single filers), and a tax of 3.8 percent on most interest, dividends, and capital gains above the same thresholds. The ACA also taxes health industries (drug companies, medical device manufacturers, and health insurers), which gained new customers due to the ACA. And to help slow the growth in health-care costs, it imposes an excise tax on very high-cost health plans offered through employers.

Congressional Republicans plan to vote to repeal the ACA as early as February, and the repeal legislation may well resemble the measure that President Obama vetoed in January 2016. That bill would have immediately ended the ACA’s revenue-raising provisions and the mandate for individuals to have health coverage, while ending the premium tax credits and Medicaid expansion after two years. This delay would supposedly give Republicans time to enact a replacement plan, but after six years they still haven’t come up with one—a meaningful replacement might never emerge. In the meantime, repeal would create disarray—even chaos—in the individual health insurance market.

Moreover, repealing the ACA taxes before enacting a complete replacement would have two other adverse consequences that have received less attention. First, it would be highly regressive, providing a huge windfall to the highest-income Americans while eliminating tax credits for millions of low- and moderate-income families. Second, it would leave inadequate resources to pay for any replacement plan that provides coverage comparable to the ACA.

ACA Repeal Would Cut Taxes at the Top and Raise Them at the Bottom

An ACA repeal bill that follows last year’s pattern would provide hundreds of billions of dollars in tax cuts to the highest-income Americans. At the same time, it would significantly raise taxes on 7 million low- and moderate-income families by eliminating the premium tax credits that help them obtain coverage and afford needed care.

Millionaires would reap more than half of the net tax cuts, each receiving a tax cut averaging almost $58,000 in 2025—more than the total annual income of families in the bottom two-fifths of the population.

The top 0.1 percent of households, a group with incomes over $4.8 million in 2025, would receive one-third of the total net tax cuts and an average cut of $261,000 apiece.

And the top 400 tax filers (with gross incomes averaging over $300 million a year) would get tax cuts averaging about $7 million each. The total tax cut for the top 400 would be as big as the premium tax credits received by 800,000 people in 20 states and Washington, D.C.

Treasury Secretary nominee Steven Mnuchin has said that under Trump’s tax plan, “there will be no absolute tax cut for the upper class.” Repealing the ACA’s tax provisions would grossly violate that pledge.

Repealing ACA Taxes Would Leave Inadequate Resources for Replacement

Repealing the ACA along the lines of the last year’s vetoed bill would not leave enough resources to pay for a replacement that provided comparable coverage to a similar number of people.

Eliminating the ACA’s coverage expansions would save roughly $1 trillion on net over the next decade. But the likely GOP plan would use about $670 billion to pay for tax cuts that predominantly benefit the well-off, in which case Republicans will need to find large new savings. And given their opposition to revenue increases, they likely will turn to Medicare and Medicaid next.

One major threat is converting Medicaid to a block grant or per-capita cap, an idea that President Trump, House Speaker Paul Ryan, and Health and Human Services nominee Tom Price have all supported. Under either approach, the federal government would provide states with a fixed amount of funding, rather than covering a fixed share of program costs, as it does now. In order to reap large savings, funding levels would be set well below what states would receive under current law, and the cuts would grow each year.

For example, last year’s House Republican budget plan would have cut federal Medicaid funding by 25 percent on average over ten years and by 33 percent in the tenth year, above and beyond the cuts from repealing the ACA’s Medicaid expansion. Cuts of this size would force state Medicaid programs to reduce the number of people they cover, the health benefits they provide, and their reimbursements to health-care providers. Low-income families and children, persons with disabilities, and seniors (including many needing long-term supports and services) would be put at risk.

Republicans are also considering converting Medicare to a “premium support” system—replacing Medicare’s guaranteed benefit with a fixed-dollar payment, or voucher, that would partly defray the cost of private insurance or a form of traditional Medicare. Premium support would generate federal savings over time because the voucher would not keep pace with health-care costs. Most beneficiaries would have to pay more than under current law if they wanted to stay in traditional Medicare, according to the Congressional Budget Office. Private insurance plans would also try to attract healthier enrollees, which would further undermine traditional Medicare by leaving it with a less healthy coverage pool.

Raising Medicare’s eligibility age will be on the table, too, if the ACA taxes are repealed. Speaker Ryan’s health plan and recent House budgets would have raised the Medicare age from 65 to 67. This change would leave many 65- and 66-year olds without access to affordable coverage or without access to any coverage at all, if the ACA’s subsidies and market reforms—which prevent insurers from denying coverage or charging very high premiums to sicker, older people—are rolled back.

Repealing the ACA without an immediate replacement is thus, as mentioned, not only bad for our health, it’s also bad tax policy. It would provide large, lopsided tax cuts for the wealthiest Americans. And it would drain resources for a replacement plan, largely at the expense of low- and moderate-income families who would lose their health coverage. Republicans are still debating whether their replacement plan should provide comparable levels of health coverage to Obamacare. However, should they repeal the law’s taxes, their hands may already be tied when the time comes to decide.

Read more about Affordable Care ActMedicaidMedicareTaxes

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Social Security, Medicare, and health coverage issues. His previous positions include Vice President for Health Policy at the National Academy of Social Insurance. Van de Water holds an A.B. from Princeton University and a Ph.D. in economics from the Massachusetts Institute of Technology.

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