A PDF of this memo is available through America Next.
Many analysts have talked the potential implications of the upcoming Supreme Court case of King v. Burwell, which debates the legality of Obamacare insurance subsidies offered in the 37 states that have not established state-run insurance Exchanges.1 However, few have noticed one key implication: A Court ruling striking down the subsidies in those 37 states would result in both a net tax cut and a decrease in federal spending and deficits. Conversely, subsequent actions, whether by Congress or by states, to re-establish the flow of premium subsidies will raise taxes, raise spending, and increase the deficit.
A Court ruling striking down the subsidies in the 37 states that have chosen not to establish state-run Exchanges would have several follow-on effects for other provisions of the law. Recently updated Congressional Budget Office (CBO) baseline estimates2 illustrate the magnitude of these implications if applied nationwide to all 50 states:
- Most obviously, the premium subsidies would disappear in the states that have not established their own Exchanges. While Obamacare calls these subsidies premium tax credits, most of the credits are paid on a refundable basis—that is, government subsidies to individuals and families with no income tax liability. CBO and other budget scorekeepers consider such refundable credits government outlays, and not tax cuts/revenue reductions. Eliminating the subsidies nationwide would result in a $775 billion reduction in outlays—the refundable/spending portion of the credits—over ten years, while increasing revenues—i.e., raising taxes for recipients who had actual income tax liability prior to receiving their subsidies—by $134 billion in the same period3.
- Because Obamacare’s employer mandate penalties only apply when employees have received premium subsidies, the employer mandate would not apply in states that have not created Exchanges, and whose citizens are therefore ineligible for subsidies.4 Nationally, eliminating the employer mandate would result in a $164 billion tax cut over ten years.5
- The individual mandate would be significantly weakened in states without state Exchanges. The law provides an exemption for all those for whom insurance premiums exceed 8.05 percent of income, after the application of subsidies.6 If subsidies become unavailable in the 37 states that have not established their own Exchanges, virtually all households receiving subsidies— those with incomes under 400 percent of the federal poverty level (FPL)—would become exempt from the mandate.7 In June 2014, CBO estimated that households with incomes under 400 percent FPL will pay 39% of the total mandate penalties to be collected in 2016.8 Extrapolating this 39% number to the ten-year estimated revenue raised by the mandate—$47 billion, according to CBO’s recent baseline—yields a total tax cut of $18.3 billion from the weakening of the mandate penalties.9
Thus, if subsidies were eliminated in every state, net tax liabilities would fall by approximately $48.3 billion over ten years—which includes the tax cut associated with effectively eliminating the employer mandate ($164 billion), and the revenue loss associated with weakening the individual mandate ($18.3 billion), offset by the tax increase associated with the revenue portion of the premium tax credits ($134 billion). Conversely, restoring those subsidies if eliminated by a Court ruling would impose a net tax increase of $48.3 billion over ten years.
Spending and Deficit Implications
Because, as noted earlier, the vast majority of the premium subsidies are refundable tax credits, which are considered government outlays, a ruling striking down the subsidies would lower federal spending appreciably. Eliminating the subsidies in all 50 states would lower federal spending by $775 billion over the next ten years.10 As a result, despite the $48.3 billion tax cut described above, eliminating the subsidies nationwide would reduce the deficit by approximately $726.7 billion for the coming decade. But if Congress or the states took action to restore the flow of subsidies, those measures would instead increase spending—and the federal deficit— by hundreds of billions of dollars.
Admittedly, the King v. Burwell case applies only to the 37 states that have not created an Exchange, and not all 50 states. However, whether examining one state, 37 states, or all 50 states, the trend from the CBO data is clear: Striking down the subsidies would 1) cut taxes on net; 2) reduce federal spending; and 3) reduce the deficit. Conversely, any action—whether by states, Congress, or both—to restore the pre-King status quo would 1) raise taxes; 2) raise federal spending; and 3) raise the deficit.
Moreover, this analysis may represent a conservative estimate with regards to the tax cut implications of King v. Burwell, as a favorable Court ruling could have a larger-than-expected impact on the applicability of the individual mandate. Withdrawing subsidies from federally-run Exchanges could also impact premium affordability for families with incomes above 400% FPL, reducing tax liabilities beyond the $18.3 billion estimated above.
The dispute in King v. Burwell revolves around whether the Obama Administration can unilaterally change what the law says. The text of the statute is clear that federal subsidies apply only to those buying policies from an “Exchange established by the state.”11 Yet the Administration promulgated regulations expanding the applicability of subsidies to all Exchanges, whether established by states or run by the federal government.
Conventional wisdom in Washington holds that, in the event of a favorable King v. Burwell ruling striking down the Obama Administration’s rule, Congress—or legislatures in the 37 states affected—will rapidly act to create state Exchanges, or allow some mechanism for subsidies to continue to flow. However, doing so will have significant adverse impacts—raising taxes, raising spending, and raising the deficit. Moreover, resuming the flow of subsidies will only further entrench both Obamacare and its harmful effects—on our budget, on our economy, and on our health care system.
Conservatives should reject any “Obamacare-lite” proposals that seek to re-establish, and further entrench, the tax increases and spending hikes under the President’s unpopular health care law.12 Instead, policy-makers should embrace the opportunity potentially presented by the Court’s upcoming ruling in King v. Burwell to advance solutions that solve the health care problem Americans worry about most—rising costs. Policies that address the problem of cost growth—including the innovative solutions put forward by America Next last spring—without resorting to Obamacare’s tax increases, massive spending, and new entitlements stand the best chance of winning the widespread public support Obamacare has consistently lacked.13
The impending Supreme Court arguments and decision in King v. Burwell provide conservatives with both a challenge and an opportunity. The case gives Congress and the states a chance to craft positive solutions on health care—granting relief to the American people from both Obamacare and rising costs—provided that they recognize more taxes, spending, and deficits are not the answer.
1. Includes 3 Federally-supported, 7 State-Partnership, and 27 Federally-facilitated Exchanges. See Kaiser Family Foundation, “State Health Insurance Marketplace Types, 2015,” http://kff. org/health-reform/state-indicator/state-health-insurancemarketplace-types/.
2. Congressional Budget Office, “Insurance Coverage Provisions of the Affordable Care Act—January 2015 Baseline,” January 26, 2015, http://www.cbo.gov/sites/default/files/cbofiles/ attachments/43900-2015-01-ACAtables.pdf.
3. Ibid., Table B-3.
4. Patient Protection and Affordable Care Act (PPACA), Public Law 111-148, Section 1513.
5. Congressional Budget Office, January 2015 baseline, Table B-1.
6. Section 5000A(e) of the Internal Revenue Code, as created by Section 1501 of PPACA, provides an exemption from the individual mandate for all those for whom self-only insurance coverage exceeds 8 percent of household income, “reduced by the amount of the credit allowable”—i.e., any applicable federal premium subsidies. The statute further provides for an annual adjustment of the threshold percentage, based on the rate at which premium growth exceeds income growth since 2013. In May 2014, the Centers for Medicare and Medicaid Services set the required contribution percentage for calendar year 2015 at 8.05 percent of income. See Centers for Medicare and Medicaid Services, “Patient Protection and Affordable Care Act: Exchange and Insurance Market Standards for 2015 and Beyond,” Federal Register May 27, 2014, http://www.gpo.gov/fdsys/pkg/FR-201405-27/pdf/2014-11657.pdf, pp. 30243-44.
7. In calendar year 2015, 400% of FPL equals $47,080 for a single individual, and $97,000 for a family of four. See federal poverty guidelines available through the Department of Health and Human Services’ Office of Planning and Evaluation, http://aspe. hhs.gov/POVERTY/15poverty.cfm.
8. Congressional Budget Office, “Penalties for Being Uninsured under the Affordable Care Act: 2014 Update,” June 5, 2014, http:// www.cbo.gov/sites/default/files/45397-IndividualMandate.pdf, Table 1.
9. Congressional Budget Office, January 2015 baseline, Table B-1.
11. Section 36B(b)(2)(A) of the Internal Revenue Code, as created by PPACA Section 1401(a).
12. Gov. Bobby Jindal, “The GOP Mustn’t Offer ‘Obamacare-Lite,’” Politico February 1, 2015, http://www.politico.com/magazine/ story/2015/02/gop-obamacare-alternative-114820.html#. VOu9RVaprwJ.
13. See America Next’s Freedom and Empowerment Plan, available at http://americanxt.org/wp-content/uploads/2014/04/The-Freedomand-Empowerment-Plan.pdf.