400% FPL is SOL

#400FPLSOL is my one of my unique Twitter hashtags.

Nick Bagley riffs on this at the Incidental Economist:

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….

Families will engage in financial engineering as they are better off claiming $97,000 in subsidy countable income while claiming advanced premium tax credits than earning $100,000.

We know that people were already engaged in financial engineering to qualify for ACA subsidies in the past when the stakes were not as high as they will be.

The first is an analysis of tax documentation from 2016 for people at the top of the subsidy scale:

examine the extent to which taxpayers’ incomes bunched below 400% FPL, we analyze a sample of taxpayers from 2013-2014 drawn from data maintained by the Internal Revenue Service’s (IRS) population of U.S. individual income tax returns. We find a significant amount of bunching below 400% FPL in 2014 that is only apparent among those who purchased insurance from a marketplace, and so would be potentially eligible for a subsidy. Further, we do not find such bunching among this same group of taxpayers in 2013, when the subsidies were not available. We see evidence of bunching at the cliff both among the self-employed and among wage and salary workers. We also calculate potential subsidies at 399% of FPL, and find that those whose income fell right below 400% FPL tended to be eligible for larger subsidies than those whose income fell above the cliff.
Finally, we examine the manner in which taxpayers lowered their income to keep it below the cliff, and examine whether such a response is consistent with a change in real economic activity, tax avoidance, or evasion. We see some weak evidence of reduction in wages on the left side of the cliff which is suggestive of labor response. However, the bunching appears to primarily have been driven by increases in contributions to IRA accounts.

People who make just over 400% FPL engaged in financial engineering to make their Modified Adjusted Gross Income (MAGI) shrink. This was more common in regions with high premiums than low premiums and I am betting that it was more common among older rather than younger tax filers given the nature of the age band and subsidies.

There are a lot of tools for people who have a cash flow above 400% FPL to reduce their legally reportable Modified Adjusted Gross Income (MAGI) to 400% FPL. Andrew Sprung has a good summary of the different legal ways to hide income from the subsidy calculation. Anything that moves money off the top line of the tax return seems like it works.

Families and individuals who are hovering just around the subsidy cut-off point can also restructure their employment relationships and/or reduce hours and compensation if they need to get under the line.

All of those responses are individually rational responses to implicit marginal tax rates that are well above 100% of income. All of thees responses that occur solely due the need to qualify for insurance are economically distortionary and inefficient. Removing the income cap and allowing subsidies to phase out as a function solely of income would remove significant distortions to individual behavior, but we’re not going to see that. The accountants and lawyers will be busy instead.