Irresponsibly Taxing Irresponsibility: The Individual Tax Penalty Under the Affordable Care Act

Abstract

In recent decades, Congress has used the federal income tax system increasingly to administer and deliver social benefits. This transition is consistent with the evolution of the American welfare system into workfare over the last several decades. As more and more social welfare benefits are conditioned upon work, family composition, and means-tested by income levels, the income tax system where this data is already systematically aggregated, authenticated, and processed has become the go-to administrative agency.

Nevertheless, as the National Taxpayer Advocate Nina Olson has noted there are “substantial differences between benefits agencies and enforcement agencies in terms of culture, mindset, and the skills and training of their employees. As the Internal Revenue Service (the “IRS”) prepares to administer large portions of the health care legislation, it will have to shift from being an enforcement agency that primarily says, in effect, ‘you owe us’ to an agency that places much greater emphasis on hiring and training caseworkers to help eligible taxpayers receive benefits and work one-on-one with taxpayers to resolve legitimate disagreements.” Inherent in and integral to the Patient Protection and Affordable Care Act (the “Act”), the health care legislation signed into law by President Obama in 2010, is an individual mandate or a new individual tax penalty, that is, the Shared Responsibility Payment (the “SRP”).

This Article will fill an existing gap in tax scholarship regarding the SRP by providing comprehensive examples of how the SRP operates for taxpayers at various household income levels. Through these examples the authors expose an inherent problem in the design of the SRP that they remedy with a statutory amendment. Part II begins with a brief history of the Act before moving to a discussion of the IRS’ significant obligations under the Act. Part III uses a series of practical examples to detail and describe how the SRP operates. Part III also details (1) what type of health insurance coverage qualifies as “minimum essential coverage” and what coverage does not; (2) the myriad of exemptions from the SRP; and (3) the actual calculation of the SRP. This analysis demonstrates the significant penalty the tax imposes - especially on the lowest income households who are not exempt. These detailed examples evidence that the SRP is notably regressive.

Congress intended that the SRP be harsh so that most households would obtain qualifying health care coverage in lieu of paying the SRP. For those households that do not qualify for an exemption and do not obtain qualifying coverage, the penalty is as significant as intended. However, the design and structure of the SRP provides a much harsher penalty for lower-income individuals than higher-income individuals. Specifically, because of the inherent floor and ceiling in the complex design of the SRP, it disproportionately taxes lower-income families at a higher rate as compared to higher-income families. Part IV presents a reconstructed SRP that resolves this issue by eliminating the floor and ceiling. This remedy not only replaces the regressive structure with a modestly progressive structure, but also meaningfully simplifies the SRP. Part V concludes by reflecting on how the authors’ redesign of the SRP better achieves Congress’ goal of affordable comprehensive health care for all.

Keywords: tax policy, health care policy, Affordable Care Act, Shared Responsibility Payment, health care mandate, individual health care mandate tax penalty

JEL Classification: K34, D31, H24, H23, H21, I11