Why Obamacare Is NOT a Tax Cut
By now you’ve heard claims from President Obama and others that Obamacare provides a massive middle-class tax cut – largely by funding coverage for health insurance through Exchanges. We figured we would take this opportunity to summarize why that claim doesn’t hold water:
CBO Scores Most of the “Tax Cuts” as Government Spending
We previously noted that, according to CBO’s March 2012 baseline, projected spending on insurance subsidies totaled $806 billion during FY2013-22. As of March, $628 billion of that $806 billion was classified by CBO as government spending, NOT reduced tax revenues. But since the Supreme Court’s ruling on Obamacare, those numbers have actually increased. CBO now assumes more low-income people who previously would have enrolled in Medicaid will receive Exchange subsidies instead in light of the Court decision. In its updated score of the repeal bill, CBO last week projected that $793 billion of the $1.017 trillion in subsidies represent government outlays, NOT revenue reductions. That means that over 78% of Obamacare insurance subsidies are pure government spending to individuals who have no income tax liability.
Democrats are quick to cite CBO to claim that Obamacare will reduce the deficit – why aren’t they also quick to cite CBO when it states that the subsidies are NOT a tax cut, but instead largely comprise new government spending?
Democrat Claims on “Tax Cuts” Undermine the Social Security Trust Fund
When confronted with the fact that most of the Exchange subsidies constitute outlay spending by the federal government, President Obama and Democrats argue that these refundable tax credits – i.e., people receiving refunds even though they have zero income tax liability – offset payroll taxes paid by the low-income. But Democrats have told Republicans for years that those payroll taxes are used solely to fund Social Security benefits, meaning those workers will get their payroll taxes back in future benefits (and especially in the case of low-income workers, will get their payroll taxes back and then some, due to the way Social Security benefits are calculated). Do Democrats now want to admit that the Social Security Trust Fund is effectively meaningless, and that those who pay only payroll taxes are funding general government obligations rather than their own retirement benefits…?
Low-Income Individuals Don’t Pay Enough Other Taxes to Offset this “Tax Cut”
Even if you disregard points #1 and #2 above, and believe that the subsidies will offset payroll and other taxes paid by individuals, the massive subsidies will still overwhelm many individuals’ total tax liability – federal, state, AND local. In its analysis of the fiscal impacts of the Supreme Court ruling, CBO noted that in 2022, Exchange subsidies for low-income individuals – i.e., those persons who were originally projected to enroll in Medicaid, but who will now enroll in Exchanges instead due to the Court ruling – will average about $9,000 per year. These low-income individuals have incomes under 138% of the federal poverty level ($15,414.60 for a single person, $31,809 for a family of four in 2012).
To put it into perspective: A single person with income of 138% FPL, or $15,414.60, would pay total federal payroll taxes of $2,358.44 (that includes employee AND employer shares). Assume also for illustrative purposes that this person would pay $1,541.46 in state and local income taxes, given a combined 10% state and local tax rate. As noted above, this person’s average insurance subsidy will total $9,000. Given payroll and state/local income tax liability totaling $3899.90, that means the individual in question would have to pay an additional $5100.10 in sales taxes for the federal subsidy to offset existing tax liability. And at a 6% local sales tax rate, an individual with income of $15,414.6 would have to spend just over $85,000 – enough to buy a Platinum Edition Cadillac Escalade – to pay enough sales tax to have a net tax liability.
All this is to say that there is virtually NO WAY some of the individuals receiving subsidies will pay enough in payroll taxes, state and local taxes, sales taxes, or any other kind of taxes for the subsidies to offset taxes they actually paid – as opposed to the government spending money to buy them health insurance.
Obamacare Subsidies are Paid Directly to Insurance Companies
Democrats’ claims to the contrary, the law and record are very clear about the fact that this massive new entitlement will go straight into the pockets of the insurance industry:
- Section 1412(c)(2)(A) of the law provides that “The Secretary of the Treasury shall make the advance payment under this section of any premium tax credit allowed under section 36B of the Internal Revenue Code of 1986 to the issuer of a qualified health plan on a monthly basis.”
- Page 37 of the report on the Finance Committee bill states: “The Committee Bill provides a refundable tax credit for eligible individuals and families who purchase health insurance through the state exchanges. The premium tax credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through the state exchanges.”
Even liberal professor Jonathan Gruber – a paid Obamacare consultant – admitted in an interview that “Most households will never actually get their hands on the credits, so their existing tax liabilities won’t actually change. In most cases, credits will go straight to insurance companies, to pay for health benefits.” And according to CBO’s updated estimates, Obamacare will now provide over $1 trillion in spending on subsidies, which will go directly into the pockets of insurance companies.
Of course, candidate Obama opposed sending subsidies straight to insurance companies when he ran for President, only to flip-flop on this issue when he signed Obamacare. An Obama campaign ad derided Senator McCain’s proposal to subsidize insurance through tax credits: “That tax credit? McCain’s own Web site said it goes straight to the insurance companies, not to you, leaving you on your own…” Likewise, in a campaign speech, candidate Obama vilified Senator McCain for this policy: “But the new tax credit [McCain’s] proposing? That wouldn’t go to you. It would go directly to your insurance company – not your bank account.”
If this isn’t enough to convince you, consider a hypothetical example whereby Congress orders the IRS to send checks to Ferrari dealerships to pay for new sports cars for all Americans with incomes under $50,000 per year. This is clearly NOT a tax cut – because the cost of the Ferrari obviously exceeds any and all taxes low- and middle-income families pay, and because the individuals in question don’t receive cash through the transaction. It’s the same situation with health insurance. And unfortunately for the shrinking number of Americans who DO pay taxes, giving $1 trillion in Exchange subsidies straight to insurance companies will prove to be a fiscal wreck that even loads of Ferraris couldn’t begin to match.