NCPA - National Center for Policy Analysis


March 4, 2010

Both the House and Senate health reform bills would establish exchanges offering people health insurance policies.  Low-income individuals and families who did not have employer-provided health insurance and obtained coverage through an exchange would be eligible for subsidies.  In both bills, the subsidies phase out with income, although the specific numbers differ, says Michael Schuyler, a senior economist at the Institute for Research on the Economics of Taxation.  

  • Under the House bill, families with incomes up to 400 percent of the poverty level would be eligible for a subsidy.
  • Income would be measured by a slightly modified adjusted gross income (AGI), and the subsidies would begin in 2013.
  • For a person at 133 percent of the federal poverty level, the subsidy would limit premiums for a basic exchange plan to 1.5 percent of AGI and cap out-of pocket expenses (cost sharing) at $500.
  • By 400 percent of the poverty level, the subsidy would limit the individual's premiums for a basic plan to 12 percent of AGI and cap out-of-pocket expenses at $5,000. People with higher AGIs would receive no subsidy.  

Subsidy phase outs create tax rate spikes, says Schuyler.  Because the subsidy would be withdrawn as an individual's income rose, its loss is equivalent to a tax on additional earnings within the phase out range. Both the tax and the marginal rate would be extremely high because the subsidy would initially be very large. 

The Congressional Budget Office (CBO) estimated the subsidies at seven income levels in 2016, from which implicit marginal tax rates due to the phase out may be calculated:     

  • For example, the CBO estimates that a family of four with an income of $54,000 (about 225 percent of the poverty level) would receive a health exchange subsidy of $14,300.
  • The subsidy would drop to $10,500 as the family's income rose to $66,000.
  • The $3,800 subsidy loss over a $12,000 income range would generate an implicit marginal tax rate of 31.67 percent. 

The subsidy phase out would penalize lower- and middle-income families for working and saving.  Because of the steep implicit tax, many individuals with incomes within the phase out range would reduce their productive efforts.  The phase out would also encourage many lower- and middle-income people to work off the books because a dollar of income under the table would often be worth two or two-and-a-half dollars over the table, says Schuyler. 

Source: Michael Schuyler, "Health Exchange Subsidies Would Impose High Marginal Taxes," National Center for Policy Analysis, Brief Analysis No. 697, March 4, 2010. 

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