The Mielke Way – The Right Thing to Do: A Better Tax Bill?
Dr. David Mielke, Retired Dean of the College of Business at Eastern Michigan University
The House passed a sweeping tax reform bill before Thanksgiving. The Senate is also working on a tax reform bill that differs in some respects, but essentially is pursuing the same goal for individual and corporate tax relief. Assuming the Senate can pass a bill, the House and Senate would then assign a conference committee to agree on a compromise and then move to vote on its passage. The Senate bill contains a provision that has brought new controversy–ending the Obamacare individual mandate which requires all individuals to have health insurance or pay a penalty. It is interesting to note, that Supreme Court Justice Roberts termed the penalty a tax when the Supreme Court ruled that the mandate was Constitutional. Democrats are uniformly opposed to tax reform citing the usual reasons of tax cuts for the rich and now have another reason for their opposition—eliminating the mandate. Why is the Senate including the repeal of the mandate in their tax reform bill? What has been the impact of the mandate? What will be the impact if the mandate is repealed? If the Senate bill is passed, should the House also adopt the repeal? What is the “Right Thing to do?” Let’s look at some issues:
- There are currently about 18 million people enrolled in the individual market. Subsidies to help pay for the premiums are available on a sliding scale to those who have income up to 400% of the federal poverty line. About 80% of those enrolled on the marketplace receive subsidies.
- The ACA’s guarantee of affordable insurance to low-income individuals and those with pre-existing conditions is due entirely to the law’s subsidy provisions. These expand automatically to whatever level is needed to subsidize low income people’s premiums. About 2 million enrolled are estimated to have major pre-existing conditions.
- About 6.5 million people opted to pay the penalty rather than enroll in Obamacare. The penalty tax ranges from $695 to $1,390 per year depending on income. 79% of households that had to pay the mandate tax had annual incomes of less than $50,000. More than one in three households that paid the tax in 2015 earned less than $25,000 and more than 90% made less than $75,000 according to the IRS. The $690 penalty starts as low as $10,350 of income. As an example, 34,000 families in Maine paid $15 million.
- Elimination of the mandate will save $338 billion over 10 years. The savings continue in year 11 and beyond. This savings is critical for the tax reform to stay withing the limit of not expanding the federal deficit by more than $1.5 trillion over the 10 years.
- The savings are also critical for the Senate to comply with the Byrd Amendment that dictates no deficits outside a 10 year window. Given that the reform bill complies with the Byrd Amendment, the corporate tax cut can be permanent, not limited to 10 years.
- The CBO estimates that 13 million more people will be uninsured by 2017 as result of repealing the mandate. However, that estimate includes 5 million people on Medicaid who get their insurance for free. Why would millions abandon health care that is free because the mandate was repealed? It also should be remembered that the Obamacare enrollment is 60% below what the CBO estimated.
- The repeal of the mandate would not change any other provisions of Obamacare, no change in benefits or coverage for pre-existing conditions and not a dollar is taken from Medicaid. About 70% of individual market enrollees would still be eligible for subsidies. Only a tiny subset of Americans would be likely to see a premium increase and that increase would amount to about 10%.
- An immediate impact of the repeal wold be 6.5 million people would receive a tax savings of $695 to $1,390 that they now pay in penalties. This would also be a tax savings to the 79% of middle and low income households that now pay the tax.
- Democrats say the tax coercion is necessary to drive more young and healthy Americans into the exchanges. In essence the young and healthy pay higher premiums to help subsidize the costs for those with higher health care needs.
- Some advocate a deal to pass the tax reform and the Murray Alexander bipartisan bill to restore insurance company subsidies to provide assurances that the exchanges will be kept in operation for 2 years.
If Obamacare insurance offers such great coverage at supposedly affordable prices, why does it require political coercion to force people to buy it? Wouldn’t the repeal provide an immediate tax cut to 6.5 million people—the vast majority in low to middle incomes? Since repeal would not change any existing health care benefits, continue pre-existing condition coverage, continue subsidies to buy insurance for low income people and not touch Medicaid, why shouldn’t people have the right to choose whether or not they want health insurance? Should the Senate agree to pass the Murray Alexander bill? Should the Senate tax reform bill include elimination of the individual health care mandate? What is the “Right Thing to do?” The Senate tax reform bill should definitely eliminate the mandate and then be added to the Republican bill and a compromise passed. The $338 billion savings assures that tax cuts for individuals and corporations stay within the magic $1.5 trillion increase in the debt and assure compliance with the Byrd Amendment resulting in the corporate rates being permanent. If it is necessary to get sufficient votes in the Senate for the tax bill, I am willing to compromise and accept the Murray Alexander bill, although subsidizing insurance companies does not make sense from a business perspective. There are no changes in benefits or subsidies for low income people, and no changes to Medicaid. The change is to remove the coercion and give people the right to choose. People now have the right to choose whether or not they buy long term care insurance, the same should be for health insurance. Anyone who wants an Obamacare policy could still buy it. Adding the repeal of the mandate makes a better tax bill.