President Trump proposed axing Obamacare’s individual mandate in a tax reform bill late Wednesday morning, to help offset the cost of reducing rates. To meet this year’s budget, an overhaul cannot increase the deficit by more than a projected $1.5 trillion over the next decade, and Republican lawmakers were reportedly still finalizing the details at the time of this writing.
At first blush, Trump’s idea, first floated by Sen. Tom Cotton last weekend, seems counterintuitive: How could eliminating a penalty that raises revenue for the government actually save money? To understand, it’s necessary to account for all the health care law’s moving parts, as the Congressional Budget Office did in its cost estimate of nixing the mandate last December.
The CBO projected that the federal government would receive $38 billion in penalties from the uninsured between 2017 and 2026. If the mandate were repealed, that represents lost tax collections to Washington.
But without a requirement to purchase coverage, millions who otherwise would be compelled to obtain it would forgo it: 15 million, per the CBO’s forecast. It’s helpful to place these 15 million into separate buckets: 7 million fewer would be enrolled in Medicaid, 6 million fewer would get a plan on the non-group market (on Obamacare’s marketplace or elsewhere), and 2 million fewer would have coverage through an employer.
The first two groups represent savings to the government, and the latter would provide it more revenue.
First, fewer Medicaid enrollees equals fewer Medicaid dollars spent by Washington: $279 billion.
Second, fewer customers in Obamacare’s individual market equals fewer dollars the government spends on the law’s health subsidies: $96 billion.
Third, the effect of individuals who decline or are shifted off group insurance provided by an employer “would result in more taxable compensation for employees,” the CBO writes. Remember, per the IRS: “If an employer pays the cost of an accident or health insurance plan for his/her employees, including an employee’s spouse and dependents, the employer’s payments are not wages and are not subject to Social Security, Medicare, and [unemployment] taxes, or federal income tax withholding.” If employers cover fewer workers, a natural way to attract or retain them is to offer other non-insurance compensation, like higher wages—the sort of compensation that is taxable. This specific development is estimated to boost government coffers an additional $56 billion; accounting for some related tradeoffs, the net effect is a $35 billion revenue increase over 10 years.
$279 billion plus $96 billion plus $35 billion equals $410 billion, which is roughly how much the CBO projects eliminating the mandate penalty would reduce the deficit the next decade. (There are an extra $6 billion of miscellaneous savings that bring the bottom-line number to $416 billion.)
That doesn’t mean repeal is a good idea in the context of tax reform. On a policy basis, the mandate is one of the pillars supporting Obamacare; wrecking it absent other reforms could sap the market of healthy customers needed to limit premiums on riskier consumers. It is not cognitive dissonance to suggest that the individual mandate is bad policy, but so is killing it just by itself.
On a political basis, the mandate could be a poison pill for tax reform. Sens. Susan Collins, John McCain, and Lisa Murkowski already opposed a “skinny repeal” of Obamacare largely centered on axing the penalty. Republicans are experiencing a difficult enough time as it is coalescing around tax legislation. Introducing the health care law to the mix certainly wouldn’t make achieving consensus any easier.
