Obamacare’s Squeeze Play on Middle-Class Taxpayers
Taxpayers are being squeezed financially in Obamacare’s tightening vice.
On one side, taxpayers already are funding Obamacare entitlements, notwithstanding President Barack Obama’s high-profile promise to spare middle-class Americans from new taxation. Liberals in Congress and elsewhere are seeking remedies, among them heavier taxpayer subsidies and bigger deficits, that will squeeze taxpayers even more.
On the other side, those whose income is too high to qualify for subsidies must pay for overly expensive Obamacare coverage without any assistance.
Obamacare’s mandates and excessive insurance regulations, which drive excessive costs, apply to all health plans in the individual market, whether offered in or out of the exchanges.
If persons get coverage in the individual market outside the exchanges, with no tax relief or subsidy to offset their coverage, they are the hardest hit by Obamacare’s skyrocketing premium and deductible hikes.
Taxes and the Middle Class
Let’s talk taxes. During the intensifying congressional debate on Obamacare, on Aug. 11, 2009, Obama said: “My belief is, is that it should not burden people who make $250,000 a year or less.”
This was—and is—pure nonsense.
Over the next 10 years, the Affordable Care Act will raise $832 billion in taxes, fees, and penalties.
Most of Obamacare’s tax increases affect middle-class Americans, either directly or indirectly. The individual mandate penalty—which the Supreme Court ruled a “tax penalty”—is one that, curiously, mostly affects lower-income Americans.
The special taxes on medical goods and services are passed on to the middle class, such as Obamacare taxes on drugs, health insurance, and medical devices. Likewise, middle-class retirees are affected by the law’s elimination of the business tax deduction of 28 percent for drug coverage.
Consider also Obamacare’s additional tax increase, in which the Medicare payroll tax jumps from 2.9 percent to 3.8 percent. Though initially confined to a tiny cohort of “the rich”—single persons with annual incomes of $200,000 and couples with annual incomes of $250,000—the Medicare tax increase will relentlessly push its way down deep into the American middle class.
Because the tax is not indexed to inflation, Medicare trustees now project that an estimated 79 percent of all workerseventually will pay the higher Medicare payroll tax.
Let’s also talk health insurance costs. Low-income folks are largely insulated from the premium shocks.
Under the Affordable Care Act, a person with an income between 100 percent of poverty ($11,770) and 400 percent of poverty ($47,080 ) is eligible for a sliding scale of premium “tax credits” if, and only if, he or she buys a health plan in the Obamacare insurance exchanges.
For most enrollees, these “tax credits” aren’t really conventional tax credits, because they’re not credited against anybody’s federal income or payroll taxes. They are simply taxpayer subsidies.
Nonetheless, given the big, impending premium hikes averaging 25 percent nationwide in 2017, these subsidies largely shield enrollees (about 85 percent) from Obamacare’s explosive costs. The higher one’s income on the statutory scale of income eligibility, the smaller the subsidies.
Likewise, if a person enrolled in an exchange plan has an annual income of 250 percent of the poverty level ($29,425) or less, that person is eligible for “cost-sharing” subsidies.
For 2017, the average “silver plan” deductibles are estimated to be $3,572 for single coverage and $7,474 for family coverage. Because of cost-sharing subsidies, eligible low-income persons also are insulated from big out-of-pocket costs.
But a large chunk of the American middle class earns too much (more than 400 percent of the poverty level) to qualify for either the premium tax credits or the cost-sharing subsidies.
If these persons don’t have, or have lost, employer-sponsored health coverage, they are in deep trouble.
They can risk going “bare” with no insurance—certainly a cheaper, yet risky option—and pay the relatively small price of taking that big risk by coughing up the individual mandate’s tax penalty. Or, instead of joining the ranks of the uninsured, they can enroll in health coverage outside the Obamacare exchanges.
The number of people who buy health coverage outside the exchanges—about 10 million people altogether—is almost the same as those who are enrolled in the Obamacare exchanges, according to the data. But if these people enroll in the individual insurance plans operating outside the exchanges, they are, as noted, unprotected from the full shock of the impending premium increases and explosive out-of-pocket costs.
One could argue that people who aren’t eligible for subsidies and who enroll in coverage outside the exchanges can find insurance options that are somewhat more generous because they have broader provider networks, assuming they can afford them.
These folks invariably are taxpayers, like their neighbors who get coverage at their place of work, but they have no tax relief to offset the cost of their more expensive coverage.
Plans on and off the exchanges are under the same benefit and insurance rules of the Affordable Care Act. The levels of coverage, with some exceptions, are categorized under the same metallic tiers—platinum, gold, silver, and bronze.
On the Obamacare exchanges, the so-called “silver” plans—the standard plans eligible for both sets of taxpayer subsidies—naturally dominate.
Outside the Obamacare exchanges, the distribution of the metallic coverage tiers is quite different. Recent researchindicates that expensive (high premium) “gold” plans have 25 percent of the individual market outside the exchanges (compared to just 12 percent on the exchanges), while 38 percent of the plans offered on the individual market were lower premium “catastrophic” or “bronze” plans with big deductibles.
This could be especially tough for people buying coverage outside the exchanges.
Next year, people on the exchanges who choose a “bronze” plan face an average deductible of $6,000 for single coverage and $12,393 for family coverage. Those buying coverage outside the exchanges also face even higher premiums and deductibles.
For middle-class families who find themselves in this situation, buying health insurance would be akin to taking out a second mortgage. People buying individual health insurance don’t even enjoy individual tax relief for their coverage unless they are self-employed.
A Genuine Free Market
In 2017, the new president and Congress should junk Obamacare’s complicated, confusing, and dysfunctional subsidy program and replace it with a simpler, more rational, and more cost-conscious system.
At the heart of that reform—as the late Nobel laureate Milton Friedman of the University of Chicago and a generation of conservative economists have argued for decades—must be the provision of individual tax relief for health insurance.
Such a new system would promote a genuine free market in health care without the excessive tax and regulatory penalties. It also would enable Americans to control their health care dollars and decisions.
That, once again, would be an enormous improvement in the lives of millions of Americans, and a positive, even revolutionary, change in the giant health care sector of the economy.
Robert E. Moffit, a seasoned veteran of more than three decades in Washington policymaking, is a senior fellow in The Heritage Foundation’s Center for Health Policy Studies. Read his research.