One more comment on that income over-reporting thing

Because the Supreme Court declined to strike down the Affordable Care Act in toto, one might forget how audacious its decision actually was. Its decision to allow states the option of declining Medicaid expansion blindsided most people on both sides of the political aisle. Depending upon who wins the 2016 presidential election, this constitutional-conservative argument could be a harbinger of more radical challenges to what one might have thought were long-settled features of federal-state policymaking.

Right now, SCOTUS has thrown another monkey-wrench into the gears turning to implement health reform. ACA’s inherent complexity combines with Republican opposition in Congress and in state capitols to pose daunting, often unexpected problems.

The latest curious possibility is that red-state residents with incomes below 100% of the federal poverty line might seek to over-report their incomes to qualify for credits on the new health insurance exchanges. Austin noted this possibility a few months ago on Twitter. With Friday’s release of ACA’s encyclopic final rule, Avik Roy and other conservatives sadly pointed out the apparent loophole permitted by CMS regulations. As Tim Jost summarizes today over at the Health Affairs blog, the final rule states:

An applicant’s claimed income must be checked against tax and Social Security records.  If an applicant claims that his or her income is greater than that shown by this data, and thus tax credits will be smaller than they otherwise would have been, the applicant’s attestation will be accepted.  If available data indicates that the applicant’s income is in excess of his or her claimed income by a “significant amount” the attestation must be verified, for example by requesting documentation.  [bold added]

Is this a big deal? Timothy doesn’t think so. He emails: “This is not a real problem.” His post notes (with dry health-wonk irony):

Some commentators have claimed disparagingly that this approach effectively creates an honor system for applicants.  In many respects, however, our income tax system relies on the honor system.  Another provision of the ACA that would have required businesses to file 1099s reporting purchases of goods in excess of $600, which was expected to produce $22 billion in revenue over 10 years, was repealed in 2011, apparently because Congress believed businesses could be trusted to self-report their income.

(Tim is name-checking the “1099 collation calamity” imbroglio that arose during the health reform debate. IRS reports compiled under the Bush administration confirm the obvious reality that tax evasion is widespread among sole-proprietors who perform such transactions.  ACA’s framers sought to tighten the paperwork to collect more revenue. The small-business community, for good reasons and bad, deemed these provisions overly intrusive and burdensome. After a faintly-comical firestorm of criticism, Congress repealed these provisions. In fact, Republicans filibustered a Democratic fix that would have exempted business purchases of less than $5,000 (and firms employing less than 25 people) from ACA’s original requirements to file 1099 paperwork. Even this, apparently, was too much.)

For obvious reasons, fraudulent income over-reporting is unusual within the federal tax code, but it is not unknown. The Earned Income Tax Credit provides incentives for over-reporting. Paid preparers face due-diligence requirements to discourage such behavior.

It’s hard to know how widespread income over-reporting might be here. Medicaid take-up rates are reasonably low. Low-income residents of deep-red states have the option to cross state boundaries to bluer states. (Come to think of it, this is an interesting issue itself.)

As always, one must reasonably balance a need to minimize bureaucratic intrusions and paperwork with a need to ensure program integrity. Ex post auditing and tightened reporting requirements might suffice to deter misreporting. Income over-reporting would require low-income individuals and those who generally file with only W-2 forms to concoct dangerously conspicuous tax forms. A 25-year-old part-time McDonald’s worker who suddenly reports $3,000 in outside income might have some explaining to do.  Income over-reporting brings other problems, such as reducing one’s eligibility for other assistance programs and (potentially) raising one’s tax bills.

I’d put this on the list of possible concerns that bear watching, but that don’t seem massively concerning. One conducts random audits and statistical analyses to try to determine the prevalence of such behavior. If it’s widespread, the IRS will need to impose tighter requirements.

One thing we do know. This is another interesting side-show brought to you by the Supreme Court, by states which refuse to take generous bribes to cover their lowest-income citizens, by Congress, which doesn’t like to provide the IRS with the resources required to effectively implement public policy, and by a broken legislative process that doesn’t permit even reasonable midcourse corrections and fixes.


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