ObamaTax Will Make Insured Sicker, More Costly

Taxes are constitutional, according to the Supremes, but the tax provisions of the Patient Protection and Affordable Care Act won't make people sign up for health insurance.

The tax--$95 in 2014, $350 in 2015, and $750 in 2016 (indexed for inflation thereafter)-is too small relative to the cost of health care coverage, about $5,500 a year for singles and $12,000 a year for families. It's a peculiar tax, because it's virtually uncollectible. Should you choose not to pay, there is little the IRS can do about it.

Besides, many people won't be required to pay. Those below 100 percent of the poverty line, illegal immigrants, prisoners-they are all exempt. Moreover, if you are fortunate enough to have certain religious beliefs or be born into a Native American tribe, you too will be exempt.

In fact, the Supreme Court decision has taken the stigma off individuals' choice of paying the tax rather than signing up for insurance. If the payment is termed a penalty, it suggests that the person who does not buy insurance is somehow at fault and is being punished. But if the payment is a tax, then it's a simple nonjudgmental choice of buying the insurance or paying the tax. Just as someone who buys gas and pays gas tax does not feel guilty, neither will someone who chooses not to buy health insurance and pays the health tax.

Since insurance companies under the Act will be required to take all applicants, healthy people, especially the young, will legally choose to pay the tax rather than buy the insurance. Why not pay $95, or even $750, to avoid paying $5,500? If you get a serious illness, or you fall off your bike, you get insurance.

These collective rational decisions will make the group of insured individuals sicker and more costly to treat, on average. Healthcare providers will be forced to raise premiums on their dwindling pool of unhealthy subscribers to make ends meet. The cost of healthcare will rise above the previously projected trillion-dollar cost calculated by the Congressional Budget Office in 2010.

With higher premiums, more will choose the tax, and the insured pool will get sicker. Premiums will have to rise, even more will pay the tax, and a downward spiral will unfold.

Unless Congress raises the tax practically to the level of premiums, or places limits on individuals' ability to sign up when sick, the system eventually will fall apart. Politicians could start health reform discussions over from the beginning, or, more likely, replace the Act with a national health insurance system, along the lines of Europe or Canada.

Equally important, the Act is structured so as to give the Internal Revenue Service limited enforcement to collect the tax, so that most individuals will be able to avoid paying it altogether.

Without changes in the tax collection method, even raising the tax will not be sufficient. In a June 25, 2012 article in Tax Notes (where I write a monthly column), found here, law professors Jordon Barry of the University of San Diego School of Law and Bryan Camp of the Texas Tech University School of Law describe precisely how the Act limits the collection of the tax penalties by the Internal Revenue Service.

Under Section 5000A, the Act does not allow the IRS to use prosecution or criminal penalties to collect the health insurance tax penalty. Further, the IRS is not allowed to place a levy on a person's property, or file a notice of lien to collect the tax. This is completely at odds with other methods of collecting federal taxes, Barry and Camp explain.

The IRS could collect the tax penalty if taxpayers were entitled to a refund of overpaid federal income taxes. The agency could then subtract the health insurance penalty from the refund. But if taxpayers underpaid their income taxes, and were not entitled to a refund, collection would be most difficult.

Barry and Camp conclude, "The restrictions placed on the IRS's ability to collect the tax penalty make it unlikely the IRS can effectively enforce the individual mandate....Thus, many taxpayers who neglect or refuse to pay the tax penalty could structure their affairs in such a way as to avoid being subject to legal consequences of any sort for years to come, if ever."

The Supreme Court's interpretation of the penalty as a tax dooms the Act to failure. The tax sets the wrong incentives, in particular encouraging people not to sign up for insurance until they are sick. Collection is difficult, despite future armies of IRS agents. The tax is a recipe for disaster.