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July 7, 2011

Health-Care Legislation Will Take Millions Off the Tax Rolls

By and

Every April 15, Americans pay closer attention to the cost of government, with millions either receiving refunds or writing checks to the IRS. But an unsettling trend has emerged over the last two decades: fewer American households are paying anything at all for the cost of government.

Last year, for the first time since the Great Depression, Americans received more from government transfer programs than they paid in all federal taxes. And roughly 40 percent of households, a percentage that has doubled over the past two decades, owed no federal income taxes or actually received more back than from Washington than they paid the previous year.

And it's about to get worse. The tax credits in the Patient Protection and Affordable Care Act will substantially increase the number of households that do not contribute to the cost of government. In fact, as a direct result of these credits, the number of households without any federal income tax liability will likely exceed half of all American households. If this happens, it may be very difficult to ever get a handle on out-of-control government spending.

Take a 40-year old couple with two kids and an income of $80,000. Most Americans would expect this couple to be paying something toward the cost of national defense and a basic social safety net. However this family qualifies for a health-care tax credit of about $4,500. The amount of the tax credit offsets what they would otherwise owe and takes them off the tax rolls. The same is true for a 50-year old couple with three kids that earns $100,000. This family qualifies for a tax credit of around $7,000 to purchase health insurance. This family receives a larger credit because the tax credit increases as the age of the policyholder increases since health insurance is more expensive for older purchasers.

In fact, this family could earn up to nearly $108,000 before it starts having any federal income tax liability. How hard is it for a household to get this tax credit? Well, as long as household income is less than 400 percent of the federal poverty line, the big limitation is that someone cannot be offered qualified coverage at work.

Of course, the generosity of the tax credits creates the incentive for employers to stop offering coverage at work. Many employees will gladly accept the trade-off of using the credits to buy health coverage on their own, especially if their employer-who is no longer paying for their insurance-can offer them a raise.

As more employers dump their health insurance plans, the tax base will shrink as additional households take advantage of the credits.

This is the primary reason why the Patient Protection and Affordable Care Act will drive up future government spending and budget deficits.

The tax credits, along with the Medicaid expansion, will cause a significant spike in the number of people who depend on, but don't contribute to, the cost of government. It will leave far fewer individuals to pay for the military, federal agencies, and state programs such as Medicaid.

Yes, these individuals will still face payroll taxes, but, contrary to popular opinion, they do not pre-fund people's social insurance compact. Households ineligible for the credit - disproportionately households that already bear the heaviest burden from the current federal income tax structure - will be left to shoulder the extra burden and growing deficit.

The tax credits are certainly harmful for the economy, but they are also politically harmful. One of their major effects will be to de-sensitize a dangerously high proportion of American households from the cost of their government.

As an unknown author once ominously noted, "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years."

Will the Patient Protection and Affordable Care Act mark that moment of discovery for Americans?

Brian Blase is a former policy analyst with The Heritage Foundation. Paul Winfree is a senior policy analyst in Heritage's Center for Data Analysis.

First moved on the McClatchy News Wire service

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