The American Health Care Act Turns Right-Side Up Tax Credits Upside Down
Update: On Thursday, May 4, the House of Representatives passed a lightly amended version of the American Health Care Act discussed in this post. The bill's changes to tax credits remain the same.
The House is poised to vote today on the American Health Care Act, the Republican Party's legislation to "repeal and replace" the Affordable Care Act. Although the bill keeps some of the provisions of the current health law, it provides a massive tax break to the wealthy and to pharmaceutical companies and it changes the way states receive Medicaid funding from the federal government. An earlier version of the bill was scored by the Congressional Budget Office as causing 24 million Americans to lose their health insurance by 2026.
But one serious change the bill makes to current law is that it takes tax credits that are currently right-side up and turns them upside down. Unfortunately, that is consistent with the majority of provisions in our upside down tax code. Whether it's dealing with homeownership, retirement or higher education – the more wealth you have, the more benefit you get from the tax code. We spend $660 billion each year helping the already wealthy build more wealth, while doing almost nothing to help Americans with lower incomes climb the opportunity ladder.
Tax Credits Under ACA: Right-Side Up
The Affordable Care Act (ACA) helped 23 million Americans gain health insurance coverage. 11 million of them gained coverage through the expansion of Medicaid and another 12 million gained coverage by purchasing private insurance through state or federal marketplaces with the help of tax credits.
These tax credits are among the most right-side up tax credits in the tax code. Simply put, that means they give the most help to Americans who need the most help.
That's why ACA's tax credits are such a rarity. ACA's tax credits are primarily based on income, and the less income you have, the more help you get. For example, a single person aged 40 making $20,000 received an average tax credit of $3,337, but a single person aged 40 making $40,000 received an average tax credit of only $452. The tax credit assistance phases out completely when a single person reaches 400% of the Federal Poverty Level (FPL, about $48,000). This is right-side up.
Tax Credits Under AHCA: Upside Down
The American Health Care Act (AHCA) keeps the basic approach of using tax credits to help Americans afford health insurance, but flips it in a very significant way: the tax credits would be based primarily on age, not income. (The assistance does cut off at incomes of $75,000 and above.) The bill uses a flat credit, starting at $2,000 for those under age 30, $2,500 for those age 30-39, $3,000 for those age 40-49, $3,500 for those age 50-59, and $4,000 for those age 60 and older not enrolled in Medicare.
Take a single worker, aged 55, making $60,000. She would not have gotten any tax credit under ACA, but gets a $3,500 tax credit under AHCA. Compare her with another single worker, making only half that income, $30,000 – she would have received an average tax credit of $5,067 under ACA, but under AHCA she receives the same $3,500 tax credit. The tax credits under AHCA provide the same amount of help to both workers regardless of their income, so long as it is under $75,000. This is upside down.
Low-income Americans that receive significant help purchasing health insurance under the ACA's tax credits receive much less help under AHCA. Vox, working with the Urban Institute's Linda Blumberg, has an excellent tool to calculate the difference between credits received under each plan using CBO's projections of premium costs. For example, a single person aged 26 with income of 140% FPL (about $17,000) sees a $76 increase in their monthly premiums moving from ACA to AHCA. A single person aged 46 with the same income sees a $243 increase in their monthly premiums moving from ACA to AHCA.
There are other problems with the tax credits under AHCA as well. They don't grow at the same rate as medical costs, eroding their purchasing power over time. And they're not adjusted for geography, meaning rural states are hit extremely hard.
Some workers – primarily young and healthy ones – do come out better under AHCA. And at the last minute, the House added a provision steering $75 billion toward affordability for older Americans not yet eligible for Medicare. But there are no details on this, just instructions for the Senate to come up with… something. It's unlikely that the Senate will abandon the approach of basing credits primarily on age.
Despite these deficiencies, the House is planning to vote on this bill later today. By doing so, they take tax credits that are, for once, right side up and turn them instead upside down.
If you want to take action, call your Senator now in advance of this bill moving to the Senate. Tell them you don't support taking critical tax credits away from workers that need them to afford health insurance. And tell them you support changes to the tax code to make it more right side up, so it provides the most assistance to those who need it most.