The tax bill approved by the Senate Finance Committee last week would repeal the tax (often called the “individual mandate”) that the Affordable Care Act imposes on individuals who do not have health insurance. Some observers are describing the repeal of the mandate as a tax increase. In reality, the repeal is a tax cut, though not a sensible one.
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Senate Finance Committee Chairman Orrin Hatch arrives for the the markup the “Tax Cuts and Jobs Act” on Capitol Hill in Washington, US, November 13, 2017. REUTERS/Kevin Lamarque
Why would anyone view the repeal of a tax as a tax increase? Because this repeal would increase tax revenue. (The revenue pickup is also a major reason the Finance Committee added the repeal to the bill.) The Congressional Budget Office estimates that the repeal of the individual mandate would prompt 13 million people to stop buying health insurance by 2027. Some of those people would end up paying additional taxes because they would no longer receive the premium tax credits offered for insurance bought on the exchanges.
The Joint Committee on Taxation scored those additional tax payments as a tax increase, which was one reason JCT concluded that the bill would raise taxes on many middle-class households. (It was not the only reason — under the bill, key middle-class tax cuts would expire at the end of 2025 while a tax-increasing inflation indexation change would remain in effect.) Opponents of the bill have seized on JCT’s analysis.
As Leonard Burman of the Urban-Brookings Tax Policy Center has pointed out, however, the additional tax payments do not constitute a burden on the affected households. If a household continues to buy health insurance after the tax is repealed, then the household’s tax treatment and its well-being are unchanged, so it clearly faces no tax increase. And if the household voluntarily stops buying insurance, then it is better off, at least by its own lights. The repeal of the individual mandate is a tax cut, not a tax increase.
However, the repeal is not good policy. As my colleague James Capretta and others have explained, it would be a serious mistake to scrap the individual mandate without an adequate replacement. Doing so would prompt young healthy individuals to stop buying health insurance, leaving a less favorable risk pool in the market and driving up premiums. To avoid this adverse selection, modification or repeal of the individual mandate should be considered only in the context of comprehensive health care reform.
