Obamacare’s labor market tax relief

Judging by my email, the main point of my post yesterday was not as clear as it could have been. So, let me come at it a different way: In addition to the new taxes it imposes, Obamacare includes the relief of a significant labor market tax. Surprised? Read on.

Recall, if you will, the labor market conditions prior to January 1, 2014. If you happened to land a job with employer-sponsored health insurance (ESI) you enjoyed (1) tax-free health benefits (the big ESI tax subsidy), (2) guaranteed issue (the group plan had to take you, pre-existing conditions and all), and (3) community rating (you were not charged more/less based on your health status). Let’s call these benefits the “Big Three,” for short.

But, if you worked for an employer that did not offer ESI or if you didn’t work at all, you couldn’t necessarily obtain the Big Three. Subsidies weren’t in place in the individual market (yet). Individual market insurers in many states could deny you coverage or charge you more based on your health. (If you happened to have a spouse with ESI coverage, you might have been able to take advantage of the Big Three. If you qualified for Medicaid or Medicare, you had other options besides the individual market.) So, the labor market was clearly tilted by an explicit tax provision (the ESI tax subsidy) and two implicit ones (the existence of guaranteed issue/community rating in some labor market circumstances but not others).

What we had was the almost necessary combination of a labor market and a health insurance market. Employers were buying labor and selling highly valuable coverage, bundled with the Big Three benefits. Potential, able-bodied workers were selling labor and buying health care simultaneously. That was the only way they could get the Big Three. Yes, there was a market for non-group (non-ESI) coverage, but it didn’t function well and it did not come with the Big Three.

What do we call this situation? I’d call it a type of labor market tax, albeit a complicated one.* Some people really had different options and some had to pay a great deal more for health insurance than others. Some couldn’t get affordable coverage at all. Relative to those with an ESI option, those without were taxed:

  • Retired early to spend more time with grandkids or to care for a sick spouse? Taxed.
  • Took a job with a small, non-profit that didn’t offer coverage? Taxed.
  • Left the big firm to start your own business? Taxed. (Yes, the self-employed can deduct health insurance premiums, but that doesn’t address underwriting and risk-rating costs. Read this as post-COBRA, if you like.)
  • Laid off and exhausted COBRA benefits? Taxed.
  • Company went bankrupt and you couldn’t immediately find a new job with ESI benefits? Taxed.
  • Fresh out of school but couldn’t find work with ESI benefits. Taxed.

You get the idea.

What happened on January 1 of this year is that this pre-ACA labor market tax was (imperfectly) addressed. Now there are subsidies in the individual market, albeit different from the ESI one. Individual market plans are guaranteed issue/community rated, like ESI ones. I acknowledge that there still exist some explicit and implicit taxes, but to have removed or prevented all of them would have been more disruptive and politically challenging, even if economically more efficient. Still, the ACA could be amended for efficiency. I’m for that!

Now, let’s consider some objections, some of which came up in emails to me:

When considering ACA taxes, you can’t fold in stuff that isn’t in the ACA, like the ESI tax subsidy or that ESI is guaranteed issue/community rated? This makes zero sense. If we take this objection seriously, then we can’t compare the post-ACA world to the counterfactual, pre-ACA one at all. The point isn’t that ESI features existed pre-ACA. The point is that the difference between what a potential or actual labor market participant faces across options pre- and post-ACA has changed. Some tax has been removed (per the above) as some have been added. You can’t just focus on the added taxes and not consider that which was removed. That’s cherry picking and incomplete.

Many people can avoid the tax you’re talking about by working at jobs that offer ESI. Those that do not are voluntarily choosing to forgo an ESI offer. To admit to this type of sorting, which does exist to some extent, is to accept my point. There really was a labor market tax and that caused people to change their behavior, to take jobs for health benefits rather than the nature of the work and/or just to avoid the tax.

The effects of addressing the tax you’re talking about are tiny relative to other Obamacare taxes. Can’t we ignore them? I have made no claim to their size. If they’re of a size so trivial that they can safely be ignored, this needs to be demonstrated. Paul Krugman wrote, “[R]educed labor supply [from the ACA] adds modestly to the true cost of health reform, although it also adds to the benefits. But the key word is ‘modestly’.”


* It might more properly be called a labor market “distortion,” but it’s not conceptual different from imposing a flat tax on everyone and then subsidizing different classes of people differently. That we would call a “tax.” UPDATE: I’m told an even more precise term would be an “implicit tax wedge,” which arises if making one decision vs. another, causes one to face differential implicit taxation.


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