Irresponsibly Taxing Irresponsibility: The Individual Tax Penalty Under the Affordable Care Act
Georgetown Journal on Poverty Law & Policy, Vol. 23, No. 3, Spring 2016
In recent decades, Congress has used the federal income tax system increasingly to administer and deliver social benefits. This transition is consistent with the evolution of the American welfare system into workfare over the last several decades. As more and more social welfare benefits are conditioned upon work, family composition, and means-tested by income levels, the income tax system where this data is already systematically aggregated, authenticated, and processed has become the go-to administrative agency.
Nevertheless, as the National Taxpayer Advocate Nina Olson has noted there are “substantial differences between benefits agencies and enforcement agencies in terms of culture, mindset, and the skills and training of their employees. As the Internal Revenue Service (the “IRS”) prepares to administer large portions of the health care legislation, it will have to shift from being an enforcement agency that primarily says, in effect, ‘you owe us’ to an agency that places much greater emphasis on hiring and training caseworkers to help eligible taxpayers receive benefits and work one-on-one with taxpayers to resolve legitimate disagreements.” Inherent in and integral to the Patient Protection and Affordable Care Act (the “Act”), the health care legislation signed into law by President Obama in 2010, is an individual mandate or a new individual tax penalty, that is, the Shared Responsibility Payment (the “SRP”).
This Article will fill an existing gap in tax scholarship regarding the SRP by providing comprehensive examples of how the SRP operates for taxpayers at various household income levels. Through these examples the authors expose an inherent problem in the design of the SRP that they remedy with a statutory amendment. Part II begins with a brief history of the Act before moving to a discussion of the IRS’ significant obligations under the Act. Part III uses a series of practical examples to detail and describe how the SRP operates. Part III also details (1) what type of health insurance coverage qualifies as “minimum essential coverage” and what coverage does not; (2) the myriad of exemptions from the SRP; and (3) the actual calculation of the SRP. This analysis demonstrates the significant penalty the tax imposes – especially on the lowest income households who are not exempt. These detailed examples evidence that the SRP is notably regressive.
Congress intended that the SRP be harsh so that most households would obtain qualifying health care coverage in lieu of paying the SRP. For those households that do not qualify for an exemption and do not obtain qualifying coverage, the penalty is as significant as intended. However, the design and structure of the SRP provides a much harsher penalty for lower-income individuals than higher-income individuals. Specifically, because of the inherent floor and ceiling in the complex design of the SRP, it disproportionately taxes lower-income families at a higher rate as compared to higher-income families. Part IV presents a reconstructed SRP that resolves this issue by eliminating the floor and ceiling. This remedy not only replaces the regressive structure with a modestly progressive structure, but also meaningfully simplifies the SRP. Part V concludes by reflecting on how the authors’ redesign of the SRP better achieves Congress’ goal of affordable comprehensive health care for all.
My co-author, James Owens and I would love to hear your thoughts on our proposal. Cool excel spreadsheet effective tax rate charts (on pages 471 and 475) are thanks to my exceptionally talented research assistant Joe Meissner.
The Surly Subgroup 
This is a very important project, Francine! Are people in D.C. aware of your work? Are there things we can do as academics to make sure our legislators are paying attention to these (presumably relatively unintended) consequences?
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Thanks Jennifer for your support and thoughtful comments. Every time I present this piece folks suggest I send a copy to every member of Congress (especially the charts as a picture is worth a thousand words and I now want to use charts in all of my scholarship). Unfortunately, this Congress has set historical precedents for doing very little. I am hopeful that 2017 will bring more productive activity. As you know the ACA has received perhaps the highest number of partisan Congressional votes (more than 50xs for repeal) — and I do not want my work cited for repeal. As academics when we expose issues we should well understand that our work can be cited for unintended propositions. I have had maddening experiences with having my undocumented scholarship cited for doing the opposite of what I proposed (e.g., annually the Republicans propose a bill requiring a SSN for the child tax credit which would deny this workfare credit to hardworking families and their communities including many US citizen children). However, I wrote this piece realizing that some may use it to suggest throwing the baby away with the bathwater, which is why I filled it with facts evincing that the ACA is working well. Nevertheless the ACA needs (like most major new systems) adjustments including with respect to the SRP. I am fortunate to have access to Senator Reid and his staff who will receive a copy as well as a sit down discussion. He is as politically experienced as anyone in getting things done on the Hill (as I hope will be the woman filling his position wen he retires). I have been getting the word out by networking with ABA folks in the Sections of Taxation, Civil Rights and Social Justice. But your broader point is that as academics we spend an enormous amount of time researching and writing and too often our work sits on a shelf rarely read in the “Ivory Tower.” This is one reason why I actively work on the front lines doing pro bono work and then blend this work into my scholarship and outreach. In Nevada, when I do education and outreach we get a surprising number (as compared to my CA experiences) of state Senators and Assemblymembers and Members of Congress and Senate staff attending our events. So we can and must do better. Thanks for inspiring me to do more because it is such a win, win.
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