I’m not an attorney, so I cannot help the federal judges struggling to figure out whether the individual insurance mandate in President Obama’s healthcare law violates the interstate commerce clause of the U.S. Constitution. But as a taxpayer (and formerly a professor of public policy), it’s hard for me to understand what all the fuss is about.
The Patient Protection and Affordable Care Act created a monetary incentive for all taxpayers to obtain health insurance. Beginning in 2014, people without insurance will pay more to the IRS than people with insurance. Like the tax code as a whole, the rules for calculating the size of the penalty are incredibly complex. But once the penalty is fully activated in 2016, a single individual with no dependents will pay an extra $695, or 2.5% of his or her applicable income, whichever is higher. An uninsured family of four with annual income of less than $110,000 will typically pay $2,085 more than it would if insured.
This tax penalty is known as “the individual mandate.” It’s an important part of the new law because starting in 2014, insurers are prohibited from denying coverage or charging higher rates based on preexisting conditions. Without the mandate, people might wait to buy insurance until they needed medical care. To keep insurance affordable for patients and profitable for insurers, healthy people need to pay for coverage before they get sick.
Various courts have viewed the tax penalty in different ways. But some have concluded that it is a huge encroachment on individual rights. As a ruling from the U.S. 11th Circuit Court of Appeals put it, “This economic mandate represents a wholly novel and potentially unbounded assertion of congressional authority: the ability to compel Americans to purchase an expensive health insurance product they have elected not to buy.”
This is the part of the debate that I find so curious. There is nothing novel or coercive about linking taxes to the purchase of specific types of goods or services. As any taxpayer probably knows, there are many tax provisions that raise or lower your tax bill depending on what you have bought and what you have elected not to buy.
“Obamacare” is unusual, perhaps even unique, in that it uses a penalty to encourage a purchase. Usually we use penalties to discourage a purchase and subsidies to encourage a purchase.
Obamacare flips this around, which is probably why people react to it so viscerally. We grumble when we pay excise taxes. We sigh when we see others getting tax breaks that don’t apply to us. But we roar when a penalty impels us to buy something we don’t want.
To my sober economist’s mind, however, there is little difference between a penalty and a subsidy. Either way, the government is rewarding or penalizing you depending on what you buy and what you don’t buy. And the resulting difference in taxes can be huge.
The most important of these provisions allows homeowners to deduct from their taxable income the money they spend on mortgage interest. For a typical homeowner, this can reduce taxes by hundreds or thousands of dollars. Those of us who choose to rent instead of buying with a mortgage from a bank are in effect penalized, and we pay this penalty every year of our lives until we either die or buy a house on credit.
Having spent half a day last April doing my family’s taxes, I’m all too aware of the other individual mandates built into our federal laws. Here’s a partial list of the specific purchases that my tax preparation software inquired about when it “interviewed” me while preparing my federal return: moving expenses, charitable contributions, student loan interest, tuition, safe-deposit fees, legal expenses, investment expenses, hobby expenses, hybrid cars, child care and, notably, medical expenses and health insurance premiums. Without this information about my retail activity, the IRS apparently couldn’t calculate how much money my family owed Uncle Sam for 2010.
In California, where we have both a state income tax and a sales tax, the list goes on. Californians are taxed differently depending on whether they buy low-emission vehicles, solar panels, California-grown rice straw, habitat restoration supplies for salmon and steelhead trout, and components to build the Joint Strike Fighter aircraft.
Every tax creates winners and losers. To evaluate whether a specific tax is good public policy, all we can do is judge whether it distributes the tax burden fairly and whether it creates positive economic incentives.
It makes sense for governments to use tax laws and other types of economic incentives to encourage behaviors that are good for society or that increase overall economic welfare, and to discourage behaviors that cause general economic harm.
When pundits oppose a particular economic incentive, they often refer to it derisively as “social engineering.” The label is apt because the legislator’s goal is indeed to engineer society by providing tangible monetary incentives that reward desirable behavior while penalizing behavior that harms the economy or other social goals.
By creating the insurance mandate, Congress intended to discourage a behavior it deemed harmful. Deadbeat patients who consume subsidized healthcare without paying into the system impose unfair costs on the rest of society.
At the same time, Congress intended to encourage behavior it deemed socially and economically desirable. According to a landmark study published in July, people chosen at random to receive Medicaid insurance in Oregon were already healthier just one year later. They also had fewer unpaid medical bills sent to collection agencies. Over time, people with health insurance will probably miss fewer days of work, spend less time on welfare and avoid defaulting on their debts through personal bankruptcy.
The bottom line: There really is no such thing as an individual health insurance mandate. No one gets carted off to jail if they fail to buy insurance. Instead, they pay a tax penalty just like the tax penalties we face for other commercial decisions we make each day. Under Obamacare, Americans are free to choose whether or not to buy insurance, just as they are free to choose whether to buy a house, or solar panels, or hybrid cars, or child care or cigarettes. Let’s stop suggesting otherwise, and start referring to the individual health insurance incentive.
William D. Leach lives in Los Angeles. He has taught public policy and economics at Cal State Sacramento and UC Davis.