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A Project of The Annenberg Public Policy Center

Twisting Health Care Taxes


Republicans are twisting the facts on taxes in the Affordable Care Act, grossly overstating the impact on families or lower-income earners.

In what has become a Republican talking point, several GOP lawmakers have wrongly claimed that a Congressional Budget Office report said that 75 percent of the federal health care law’s taxes would be paid by those earning less than $120,000 a year. That’s not what the CBO said. It found that 76 percent of those who would pay the penalty for not having insurance in 2016 would earn under $120,000. The average annual penalty — which the Supreme Court labeled a tax — is $667 for those individuals. Most of the total tax revenue from the penalty would be paid by those earning more than $120,000 a year.

In addition, Rep. Steve Pearce of New Mexico went beyond the language used by the high court in calling the cost of an insurance policy a “tax” when he said: “[T]he average American family will pay roughly $4,700 a year in new taxes.” His office told us that was a reference to what an employee might pay for family insurance premiums. For starters, the “average American family” already has insurance. Plus, paying a premium to an insurance company isn’t paying a tax, by the standard definition, and most of those who stand to gain insurance under the law would receive subsidies to do so.

A Growing, False Talking Point

Let’s start with the idea that most of the taxes in the law are paid by those earning less than $120,000 a year.

  • Rep. Alan Nunnelee of Mississippi made the claim in a July 18 column published by The Memphis Commercial Appeal, saying: “The nonpartisan Congressional Budget Office says that 75 percent of the cost of Obamacare will be paid by people making less than $125,000 per year.”
  • Rep. Lamar Smith of Texas made a similar statement in a press release on the House Judiciary Committee website on July 11: “After the Supreme Court’s decision, we now know that Obamacare is a massive tax hike on the middle class. According to the Wall Street Journal, 75 percent of the laws [sic] new taxes will be paid for by families who make under $120,000 per year,” he said. Smith’s statement twisted the words of WSJ editorial board member Stephen Moore, who referred to who would pay the individual mandate penalty.
  • Rep. Frank Guinta of New Hampshire included a version of the claim in a press release, also on July 11: “This law will hit most Granite State families hard. That’s because it contains 21 new or higher taxes, with 75% of them falling on the middle-class.”

Senate Minority Leader Mitch McConnell almost got it right on “Fox News Sunday” on July 1: “The president said [the mandate penalty] was not a tax. The Supreme Court, which has the final say, says it is a tax. The tax is going be levied, 77 percent of it, on Americans making less than $120,000 a year.”

The claim is based on a 2010 Congressional Budget Office report that shows the projected revenue in 2016 from the law’s penalty on those who choose not to have health insurance. In a 5-4 decision in late June, the Supreme Court upheld the constitutionality of the law, saying that the penalty was a “tax” that Congress could levy. Republicans have criticized the law for this new “tax,” but several are misconstruing the CBO report in the process.

According to the report, the CBO and Joint Committee on Taxation estimated that 76 percent of taxpayers who will pay the mandate penalties in 2016 will have incomes at or below 500 percent of the poverty level (see the chart on page 3). The 2016 poverty level is expected to be $24,000 for a family of four, so families at 500 percent of the poverty level would have an income of $120,000 annually. However, these 76 percent of penalty payers account for only 46 percent of the mandate penalty revenue, as shown in the same table, because the penalty amount increases proportionally with income.

So, the CBO report comes nowhere close to backing up the claim that those earning under $120,000 incur “75 percent of the cost of Obamacare,” as Nunnelee put it. In fact, the report shows that those income earners won’t even pay the majority of the taxes for not having insurance.

According to the report, 3.9 million taxpayers will pay the mandate penalty/tax in 2016. Of these, 3 million will earn less than $120,000, and pay a total of $2 billion, averaging $667 per penalty-payer. The remaining 900,000 penalty-payers (those with incomes above 500 percent of the poverty level) will foot $2.3 billion, an average of $2,556 per payer.

The law sets the tax at a minimum of $695 per person in 2016. (The lower average payment according to the CBO and JCT table is likely due to rounding.) But the tax would increase with income. It would be 2.5 percent of household income beyond the threshold for filing a tax return (which was $9,500 for an individual in 2011). The penalty will be capped at the national average of the lowest cost plan offered through state-based exchanges. We don’t yet know what that will be.

Rep. Smith attributes the figure to the Wall Street Journal, but that, too, misconstrues what Stephen Moore, a member of the Journal‘s editorial board, said in a June 30 interview on Fox News. Moore was speaking about the penalty for not having insurance when he said: “We found that about three-quarters of whatever you want to call them … taxes, fines, penalties … about three-quarters of those costs will fall on the backs of families that make less than $120,000.” We understand that Moore’s phrasing, “three-quarters of those costs,” may have given the impression that 75 percent of the revenue collected from the mandate penalty would come from those earning under $120,000 — rather than 75 percent of those paying the tax would make under that amount. But, even so, he didn’t say that “75 percent of the laws new taxes will be paid for by families who make under $120,000 per year,” as Smith does.

Not everyone has twisted the CBO report. Sen. Jim DeMint got it right on his website earlier this month: “The Congressional Budget Office analyzed this issue back in April 2010. It found that more than three-quarters of individuals paying the mandate tax will have income of under five times the poverty level – or less than $120,000 for a family of four.”

Before politicians started twisting the numbers, the CBO report was widely misconstrued on Facebook, as our colleagues at PolitiFact previously noted.

The CBO has updated its estimates since that 2010 report. The most recent estimate, released in March of this year, says the mandate penalty would bring in $6 billion in 2016, and $45 billion over 10 years. There was no breakdown on who would pay the tax. The CBO is expected to release another report on the mandate this week.

Who Pays Most of the Law’s Taxes?

The total mandate penalty revenue is only a small part of the total tax increases under the ACA, which are estimated by the Joint Committee on Taxation to be $49.9 billion in 2016 alone, and to total $675.3 billion over the next 10 years (excluding mandate penalties). And the biggest revenue-generating taxes by far fall on those earning more than $200,000 a year, or $250,000 a year for couples.

Those upper-income earners will pay an additional 0.9 percent Medicare tax on income above those thresholds, and they’ll pay a 3.8 percent tax on investment income. Those two taxes in the law account for $317.7 billion over 10 years, according to JCT estimates. That’s 47 percent of the total tax revenue from the law — again, excluding the mandate penalty.

The next largest tax is the excise tax on high-cost health insurance plans, which is expected to bring in $111 billion over 10 years. As we’ve explained in the past, that revenue doesn’t come from the excise tax itself. Rather, the CBO and JCT expect employers and employees to sign up for plans that stay below the excise tax threshold. Employers would then increase workers’ salaries in lieu of giving more expensive benefits. And the government would make money on the increased payroll tax revenue on those increased salaries.

Redefining Taxes

At least one lawmaker has taken to calling the cost of insurance premiums “taxes,” and making the greatly exaggerated claim that the “average American family” would get hit with thousands of dollars in “taxes” by buying health insurance. In a July 17 op-ed for the Las Cruces Sun-News, New Mexico Rep. Steve Pearce said that under the health care law: “All told, the average American family will pay roughly $4,700 a year in new taxes.”

When we asked Pearce’s office for support for the claim, a spokesman told us the $4,700 figure was a calculation of 7 percent of an average family’s income, and that 7 percent of income is what an employee might pay for employer-based insurance. (The column, however, suggested that this is the amount of the mandate tax.) We find several problems with this logic.

First, the “average American family,” as Pearce says, already has insurance. They won’t pay any of Pearce’s loosely calculated “new taxes.” The CBO estimated that 82 percent of nonelderly Americans have health insurance in 2012 (excluding undocumented immigrants). Second, paying an insurance company a premium for a health care plan is not equivalent to paying a tax to the government, and Pearce didn’t explain in his op-ed that he was redefining what a tax is.

Third, many of those who do decide to buy an insurance policy under the law won’t pay full price. Of the 33 million previously uninsured who would gain coverage by 2022, according to the CBO, 17 million would join Medicaid or the Children’s Health Insurance Program. Twenty-two million would buy coverage through the state-based exchanges, and only 5 million of those would do so without receiving any government subsidy. (Also, the CBO projects a net 3 million dropping employer coverage and another 3 million dropping individual coverage, which is how it gets a total net of 33 million gaining insurance.) Those earning under 400 percent of the federal poverty level would be eligible for subsidies, and the average subsidy per exchange enrollee would be $7,270 in 2022, the CBO estimates. That’s an average, so the subsidy each individual receives could vary substantially.

It’s true that a health insurance policy purchased by a family on the state-based exchanges, or now on the individual market, could cost about $4,700 for the year, or substantially more. And the CBO estimated in a May 2011 report that some families would pay that much and more even with the help of federal subsidies. Under the CBO’s hypothetical example for the first year of the subsidies (2014), a family at 150 percent of the poverty level would pay $1,200 for an insurance policy and a family at 350 percent of the poverty level would pay $6,700, with subsidies that exceed that amount.

CBO, May 2011: In the first year of the illustration, premiums for the reference plan for a family of four are assumed to be $15,000, and the federal poverty level is assumed to be $20,000. In this hypothetical example, a family with income equal to 150 percent of the FPL (or $30,000) will be required by the law to pay up to 4.0 percent of its income ($1,200) to enroll in the reference plan and thus will be entitled to a subsidy of $13,800 ($15,000 minus $1,200). Families with higher income will be required to pay a larger percentage of their income to enroll in the reference plan. Specifically, a family with income equal to 250 percent of the FPL will pay 8.1 percent of its income to enroll in the reference plan (about $4,000) and will receive a subsidy of about $11,000, and a family with income equal to 350 percent of the FPL will pay 9.5 percent of its income (about $6,700) and will receive a subsidy of about $8,400.

But the premiums those families would pay are not “taxes” by the normal definition, and the federal subsidies they would receive in most cases are even larger than their premium payments.

There are plenty of taxes in the Affordable Care Act, but Republicans are manipulating the facts to overstate the impact on lower-income earners.

— Lori Robertson and Jesse DuBois

Update, July 24: The CBO released new estimates on July 24 on the impact on insurance coverage. It says that 6 million fewer individuals would join Medicaid by 2022, 3 million more would join the exchanges and 3 million more would be uninsured. The change is due to the Supreme Court ruling that effectively meant states did not have to comply with the law’s expansion of Medicaid eligibility. The change also lowers the cost of the insurance coverage provisions by $84 billion over 11 years. The CBO’s 10-year estimate for total revenue from penalties paid by individuals for not having insurance is now $1 billion higher than the previous estimate.