• Above 400% FPL is SOL

    That’s Dave Anderson’s coinage, and I’ve encouraged him to get it tattooed somewhere on his body. It’s going to come up a lot over the next couple of years.

    Because the ACA caps the premiums for those making four times the poverty level, the costs of the Trump administration’s sabotage—the repeal of the individual mandate, the impending expansion of association and short-term health plans, cuts to the outreach budget—will fall hardest on the relatively affluent, who aren’t subject to the same caps.

    Consider a family of four in Arizona earning $98,000. They’re just under the 400% threshold, so they pay $9,506 in premiums for a standard silver plan (that’s 9.7% of $98,000). The federal government picks up the rest of the tab. A family earning $100,000, in contrast, has to pay full freight, or $18,348. That $2,000 increase in wages thus translates to a decrease of $8,842 in household income, or an effective tax rate of about 442%.

    In practical terms, a family of four that buys private coverage in Arizona will be indifferent between earning $90,000 and $100,000. Either way, its household income will be roughly the same. (I’m ignoring tax effects and holding the plan type constant, so don’t be too slavish about the particular figures. The basic point holds.) On that $10,000 of income, the marginal tax rate is 100%, at least if the family wants insurance.

    That indifference gap is wider in higher-cost states (like Alaska) and narrower in lower-cost states (like Michigan). In every state, however, the size of the “100% bracket” will increase by one dollar for every one dollar in premium growth. Sabotaging the exchanges will thus sharply increase the effective tax rate for affluent people who lack employer-sponsored coverage, both now and well into the future.

    That’s an odd outcome for a President who’s ostensibly committed to tax cuts. It can’t be good for the labor markets. And I doubt it’s politically sustainable.

    * * *

    As the exchanges become less advantageous for the affluent, they’ll find employer-sponsored coverage more appealing. At the same time, however, the new tax bill affords those very same people a strong incentive to shed their employer coverage. As David Kamin and Lily Batchelder recently explained:

    [A] new deduction allows people with pass-through income—profits from a partnership or sole proprietorship, for instance—to write off 20% of that income before calculating their taxes. …

    Let’s say a hypothetical worker wants to claim this 20% deduction. The first hurdle is that the new law says that you cannot claim the deduction if you are an employee. This means the worker would probably need to give up all or most of her employee benefits—health insurance, retirement plan, vacation pay—in order to be considered an independent contractor, since benefits are one way the tax system determines who is an employee. She will also have to pay her employer’s share of the payroll tax.

    So which is it? If you keep your employer-sponsored coverage, you lose the 20% deduction. If you become an independent contractor, you’ll pay through the nose for health insurance.

    The ultimate decision will vary with individual circumstances and the local insurance market. Allowing small businesses and “sole owners” to band together to buy association health plans, as the Trump administration has proposed, will complicate matters still further. But there’s no question that recent changes will have complex and tumultuous effects on a phenomenon known in the literature as “job lock.” (Austin and I have a series on it here.)

    In an ideal world, tax and health policy shouldn’t influence how you structure your employment relationship. That was one of the goals of the ACA: to make it so that you could quit your dead-end job and start a new business without fear of losing health insurance. For people making less than four times the poverty level, the ACA has likely eased job lock. But the Trump administration’s sabotage will force people who earn more to make a difficult reckoning.

    As Dave says, above 400% FPL is SOL.

    @nicholas_bagley

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