By 2021, federal health insurance purchase tax subsidies could amount to about 13 percent of the insurer's total 2011 premium revenue.
Analysts at the Congressional Budget Office (CBO) have analyzed the premium assistance tax credit, a component of the Patient Protection and Affordable Care Act of 2010 (PPACA), in a general report on refundable tax credits.
An ordinary tax credit is an amount that a taxpayer can subtract directly from the amount a taxpayer owes the government.
Traditionally, if using a tax credit would make the taxpayer's tax bill a negative number, the taxpayer simply got out of paying taxes, or possibly could apply the amount to the next year's tax bill.
When using a refundable tax credit produces a tax obligation amount that happens to be a negative number, the government pays that amount to the taxpayer, CBO analysts wrote in their report.
The topic is of special interest this year, because the drafters of PPACA used refundable tax credits as the vehicle for helping low-income and moderate-income pay for health insurance.
When Congress created the first refundable tax credit -- the Earned Income Tax Credit (EITC) program -- in 1975, the goal of that program and later, similar programs was mainly to help low-income people increase their income, the analysts said.
In the past, Congress usually used spending programs such as the Food Stamp program, Medicaid and Pell Grants to help people pay for specific goods and services, such as food, health care or education, the analysts said.
Today, because tax credit programs tend to be more palatable to members of Congress and to the credit users than "government handouts," Congress has structured more aid programs as refundable tax credit programs.
The EITC program and the child tax credit program will be by far the biggest refundable tax credit programs this year, and they are on track to generate about $125 billion of the $149 billion in refundable tax credits that taxpayers will report, the analyst said.
The new PPACA premium assistance tax credit could lead to about $35 billion in credit costs in 2014, and $110 billion of the $213 billion in total refundable credit costs in 2021, the analysts said.
U.S. health insurers took in about $864 billion in premium revenue in 2011, according to government estimates.
Tax credit recipients are supposed to use the premium assistance tax credit to pay health insurance premiums, and most will then have to use some of their own cash to cover the rest of the cost of the premiums.
Private health insurers are expected to generate much higher premium revenue in 2021 than in 2011, but, if consumers had spent an additional $110 billion in health insurance in 2011, that would have increased their revenue by about 13 percent.
Distributing benefits through refundable tax credits rather than through direct spending programs may effect the fairness of the tax system, the complexity of the tax system, and the efficiency of how resources are allocated in the economy, the analysts said.
In some cases, the analysts said, researchers have suggested that well-designed refundable tax credits might increase fairness and resource allocation efficiency.
Studies have suggested that the EITC has helped lead to a big increase the employment and earnings of single mothers that took place in the 1990s, the analysts said.
In the past few years, as the result of the weak economy, older tax credits, and new, stimulus-related tax credits, the average individual income tax rate for households in the bottom 40 percent of the income distribution has been negative, the analysts said.
The analysts also talk about questions about the complexity of administering the premium assistance tax credit.
PPACA lets individuals ask to get an advance on the premium assistance tax credit that they expect to collect, so that they can use the amount to pay for health coverage in 2014.
The government is supposed to pay the advance payments directly to the health insurers, and PPACA will limit how much individuals have to pay back if the government pays an advance premium assistance tax credit amount that happens to be bigger than what an individual actually qualifies for.
The amount the individual ends up qualifying for will depend on how much the individual earns, who else is in the individual's family, and how much others in the individual's family earn, and the initial, preliminary credit determination will depend on what those factors look like two years before the individual officially gets the credit, the analysts said.
"The amount of the credit will later be recomputed on the basis of the taxpayer's characteristics in the year that the subsidy is paid," the analysts said. "As a result, some recipients may have to repay part or all of any overpayment if changes in their family's composition and income affect their eligibility for the credit or its amount."
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