Obamacare’s Uninsured Tax is a Mouse

By :: July 3rd, 2012

The Affordable Care Act’s tax on those who choose not to buy health insurance was the linchpin of the Supreme Court’s decision to uphold the law’s constitutionality. But in reality, the tax (nee penalty) is a mouse.

The tax itself is modest, at least to start. It will affect relatively few people. And it will be almost impossible for the IRS to make anybody pay it.

The Urban Institute’s Health Policy Center estimates that if the law were in effect today, only about 7 percent of the non-elderly, or about 18 million people, would be faced with the choice: Get insurance or pay the tax. To put it another way, 93 percent, or 250 million, would not—either because they already have insurance or because the ACA explicitly exempts them from the levy.

But that doesn’t mean that 18 million will owe the tax. Many will buy insurance rather than pay the fee.  About 11 million, or about 60 percent of those subject to the tax, will be eligible for government subsidies to buy their own coverage.

For some, that help will still not be enough to make insurance affordable. And about 3 percent of those under 65—or about 7 million individuals--will have to acquire insurance and pay the full cost. Many in those two groups may choose the tax rather than insurance.

Keep in mind these estimates are subject to much uncertainty. For instance, some employees will lose their employer-sponsored health insurance as a result of the ACA while others will get new coverage. Sorting that out is challenging, but Urban’s projection is consistent with others.

Then, there is the amount of the tax. In 2014 the initial levy will be just $95. By 2016, it is scheduled to increase to $695 or 2.5 percent of taxable income—up to a maximum of $2,085 (indexed for inflation in subsequent years). It will increase, that is, if Congress does not slow the phase-in. And I’ve got a funny feeling about that.

Overall, the congressional Joint Committee on Taxation estimates the tax would generate about $54 billion over eight years (assuming the tax rises as scheduled). Not nuthin’ but pretty modest as these things go.

Finally, there is the issue of whether the IRS can collect the tax if someone refuses to either buy insurance or pay the fine.  The ACA says the IRS should enforce the law by imposing a tax penalty—but then effectively blocks the agency from using most of the tools it normally uses to go after tax scofflaws.

The ACA bars the IRS from bringing a criminal enforcement case against someone who refuses to pay the non-insurance penalty. And it makes it very difficult, if not impossible, for it to enforce a tax lien. Law professors Jordan Barry and Bryan Camp have a nice piece in Tax Notes explaining it all.

That leaves only one tool—the IRS can subtract the penalty from any refund it owes a taxpayer. But that applies only if the IRS happens to owe somebody a refund. These days, two-thirds of taxpayers get one, but it is usually their choice.

Only low-income households who receive refundable credits, such as the Earned Income Credit, always get refunds. But the ACA specifically exempts most of them from the tax because their income is so low.

Bottom line: Notwithstanding the nutty Internet rumors that the IRS is hiring 20,000 revenue agents to collect the tax, most people who really want to game the system will probably get away with it.

Of course, this creates a big problem.  The law requires insurance companies to sell to all comers regardless of pre-existing medical conditions. But if the tax fails to encourage healthy people to buy right away and not wait until they need coverage, the rest of us will end up paying higher insurance premiums as a result.

And that’s the trouble with this entire mechanism.  The Supreme Court calls it a tax. President Obama and Mitt Romney’s chief spokesman insist it is a penalty. But here’s a better label—inadequate.





  1. Nate  ::  2:14 pm on July 3rd, 2012:

    I think you underestimate people compliance rate. The same thing was put into place in Massachusetts (weak enforcement), but the vast majority of the population comply with the law. In addition, I think we can count on people’s ignorance with regard to the lack of enforcement of the penalty (like in MA).

  2. Michael Bindner  ::  5:41 pm on July 3rd, 2012:

    The key question is really whether the stock markets will declare that mandates are inadequate to keep people from getting insurance when they get sick and not until then. Essentially, the question on their minds will be who is more risk averse – investors or those currently uninsured. The answer may determine whether private insurance survives, is replaced with single-payer because the political system cannot act fast enough, or results in a consumption tax-subsidized public option for everyone the insurance industry cannot afford to cover while keeping rates low.

  3. Ralph H  ::  9:00 am on July 5th, 2012:

    In fact the people who will be screwed most will be us savers as our income from stock dividends, bonds, interest, and rent will now be subject to a new Medicare tax. I have seen no protest against this, which I find strange. Continuing Obama’s war against productive people in favor of those who do not work.

  4. Tax Roundup: 7/5/2012 « Roth & Company, P.C  ::  9:32 am on July 5th, 2012:

    […] thought it was a dessert topping: Obamacare’s Uninsured Tax is a Mouse. (Howard Gleckman,  TaxVox) The tax itself is modest, at least to start. It will affect relatively […]

  5. Tax Roundup, 7/6/2012: Conserving public funds; worse things than lost deductions; undermining Obamacare « Roth & Company, P.C  ::  9:16 am on July 6th, 2012:

    […] If they fail to enroll, it’s not because of the influence of the sinister Tea Partiers, any more than it is the fault of the Masons or the Illuminati.  They will fail to enroll for the same reasons that millions of people go without health insurance now — cost, hassle,  lack of perceived need, etc.  On top of that, the Obamacare rule against pre-existing condition policy restrictions will make it easier to go without insurance.  That way you can just wait until you are sick to go to the insurance company.  People don’t need the Tea Party to tell them that.  Then again, maybe this is Howard Gleckman’s coming out as a Tea Partier himself. […]

  6. B Taxey  ::  12:17 am on July 8th, 2012:

    What makes no sense is that by the time Obama finishes excluding people (or subsidizing them), the only ones left are the young and healthy, who don’t work for the government or some employer with coverage, and they are the ones most likely not to need it! I guess Obama hasn’t visited a public hospital late at night and looked around. It is not the young and healthy, who are seeking services. It is the elderly, the homeless etc. It just seems like another way to gouge the young to pay.

  7. Amy  ::  7:19 pm on April 9th, 2013:

    I won’t be buying any insurance, it doesn’t pay for the treatments that work for me. I pay out of pocket for all my medical expenses, I can’t afford these expenses and to pay for insurance I don’t use. I will just be paying a penalty because I chose to use Alternative Health.

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