Verification of income for the ACA tax credit
Earlier this week there were some news articles discussing the decision by the Obama Administration to scale back regulations covering the verification of income governing eligibility for the income tax credit for the purchase of health insurance on state exchanges.
I have written on this topic both in previous posts and formerly when I was a government economist.
Policy makers and the public still lack clarity about the scope of this problem.
The need to cancel this regulation suggests a lack of foresight by the Obama administration. The unworkable regulation should not have been created in the first place. Eligibility for the tax credit is based on actual income at the end of the year. People sign up for the tax credit at the beginning of the year prior to knowing their actual income. IT IS IMPOSSIBLE TO VERIFY WHAT YOU DON'T KNOW ESPECIALLY WHEN IT IS UNKNOWABLE.
Household income is highly variable and affected by many factors including the number of hours worked, whether a layoff occurs, duration of layoff, duration of search time for a new job, whether a spouse returns to work, end of year bonuses ..... Around 30 percent of households that claim the tax credit will understate their income. Many of these households will owe the IRS thousands of dollars.
The most severe income verification problems occur when households earn slightly more than 400 percent of the poverty line and lose the entire tax credit. The number of households subject to large repayment obligations would be much smaller if the credit were phased out. This would require an act of Congress, an unlikely event given the pleasure Republicans take when they hurt our President.
There are caps on repayments for individuals who make between 100 percent and 400 percent of the poverty line. Caps were increased after passage of the ACA because of budget negotiations. Democrats do not seem to appreciate how the repayment problem might undermine support for the ACA.
It is easy to suggest that household should be conservative when projecting their income when claiming the credit. However, the insurance purchase is mandated by law and many households do not have enough liquidity to guarantee continuous coverage.
Today's CNBC article titled "Feds: Don't even think about cheating" suggests the Obama Administration just does not get it. The individual mandate requires individuals to purchase insurance even if they don't have the funds on hand. The only way a lot of young adults with tons of student debt are going to be able to purchase insurance is if they claim the tax credit. Are these people cheaters if they work a little too hard and earn more than they anticipate?
There is also an unusual aspect of this problem for households that end up earning less than 100 percent of the poverty line and are not eligible for the tax credit because they do not make enough. It was envisioned that these low-income people would be covered by Medicaid but the Supreme Court allowed states to limit Medicaid coverage. Consider this situation. A person claims the tax credit, gets severely hurt, must stay in a hospital and does not qualify for the credit BECAUSE HE OR SHE DOES NOT EARN ENOUGH. Should the IRS pursue this person for repayment or should the administration consider executive orders to rectify this problem?
There never should have been serious discussion of verification regulations because it is impossible to verify the unknown. When IRS and Treasury officials created their option list they should have included some discussion of the impact of their proposals on household finances and the ability of households to pay for insurance during the year. The Ivy political appointee economists hired to analyze this issue should have done more than take notes.
The Obama Administration needs to take steps to minimize the hardship caused by the combination of the individual mandate and a poorly designed tax credit. Some suggestions: Households that owe the IRS should be allowed to purchase a higher deductible policy rather than be subject to collection efforts. (Collection efforts should be a last resort.) Married households should be allowed to file joint returns and claim the credit. (I believe the Obama administration should issue an executive order making clear the ACA allows this.)
Final thought: Hard to tell how all this plays out politically. The Obama administration is learning (albeit slowly.). The republicans are enjoying the discovery of new ACA problems a bit too much and they are not offering constructive alternatives. I guess we should stay tuned.