The Dead-Weight Cost of Obamacare’s Confusing Tax Credits

mnsure-dot-org-ss_mainObamacare crushes jobs because of its loopy distribution of tax credits. As discussed previously, the tax credits (which reduce premiums) for Obamacare coverage phase out in such a way that beneficiaries face very high marginal income tax rate hikes at household incomes up to 400 percent of the Federal Poverty Level.

However, even those who increase their incomes despite the higher tax burden face the hassle of figuring out how much they owe in tax and premium at the end of the year. This imposes a dead-weight loss on the economy, wasting people’s time and energy. Here is an example:

Last year, Santa Ana resident Kevin Foley successfully enrolled in an Obamacare insurance plan, thanks in part to a popular tax credit that helps low-income earners afford plans through the exchange.

But after a sudden increase in income and the arrival of tax season, Foley’s situation began to get messy. An $800-plus bill with errant charges from Kaiser Permanente, his insurance provider, unexpectedly propelled Foley into the inner workings of a young, government-sponsored program as he searched for a refund.

Foley’s tax dilemma centered on the repayment of the Advanced Premium Tax Credit, a government subsidy that helps reduce the premium costs of plans purchased through state-run insurance exchanges.

From the get-go, Foley was supposed to repay the tax credit directly to Uncle Sam, not to Kaiser. In other words, in his case, Kaiser essentially got paid twice and Foley was on the hook for another large tab.

This convergence of taxes and health care has been problematic for others, too. Roughly 1.4 million tax filers last year did not report their Obamacare tax credits properly or at all, according to IRS data released in January.

(Lily Leung, “Obamacare Tax Credit Turns Into Headache,” Orange County Register, July 27, 2016.)

For someone whose income at the end of the year is different from what he anticipated at the beginning of the year, the arithmetic would be difficult even if the tax credit were transparent. However, it is not. Tax credits are paid to insurers for the benefit of subscribers, not subscribers directly. For political purposes, this is underemphasized when applying for coverage on the exchange. Beneficiaries are induced to believe Obamacare has reduced premiums versus the individual market that existed pre-Obamacare. The fact that actual premiums are significantly reduced by tax credits is not detailed during the process.

A solution to this confusion would be to replace the confusing Obamacare tax credits with a universal tax credit, perhaps adjusted for age but not for income. If (to limit costs to taxpayers), it has to be phased out by income, it should phase out at a flat rate, and not impose a roller-coaster of marginal tax rate hikes on those who seek to increase their incomes.

Comments (5)

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  1. Ron Greiner says:

    These poor Obamacare schmucks. If the government asks them to produce a document the government cannot match it to their file when they do send it in. The result is their premium jumps from $350 a month to $1,400 a month because they automatically lose their tax credits, it’s a nightmare.

    I talk to multiple people per day that say they have lost their Obamacare tax credits and insurance and now they are not in Open Enrollment so they are uninsured, it’s pathetic.

    If Hillary is getting shots of DIAZEPAM this country is in big trouble. Hillary needs something to produce a calming effect. But, what about the American people?

    • Erik says:

      Ron, They would have a qualifying event which would allow them to enroll in a lower cost plan.

      • Ron Greiner says:

        Non-payment of premium does not produce a Special Enrollment Period (SEP).

        You are under-informed Erik.

        • Erik says:

          You did not mention termination for non-payment. Moving the goal posts Ron.

          An unexpected increase in cost is a qualifying event.

  2. Ron Greiner says:

    NewsFlash: The next president is going to have huge problems with Obamacare.

    Both Aetna and Anthem are saying Obamacare is doomed!

    “From a policy point of view, we’re basically seeing the exchanges unravel,” said Michael Abrams, a healthcare strategist with Numerof & Associates who consults for insurers including UnitedHealth Group.

    “More than anything else, it’s a serious symbolic blow to ObamaCare,” he said.

    The two companies’ abrupt decisions to pull back from ObamaCare have baffled healthcare experts. Both Aetna and Anthem had previously been optimistic about the marketplace, unlike UnitedHealth, which had been cautious from the start.