The Corner

Just How Bad Will the Labor-Market Effects of Obamacare Be?

My colleague Matt Mitchell sends me the two following papers from University of Chicago’s Casey Mulligan on the cost implications of the ACA. The first one looks at the average marginal income rates for workers under the ACA (a.k.a Obamacare). He finds that that price tag is fairly heavy:

The Affordable Care Act includes four significant, permanent, implicit unemployment assistance programs, plus various implicit subsidies for underemployment. Every sector of the economy, and about half of nonelderly adults, is directly affected by at least one of those provisions. This paper calculates the ACA’s impact on the average reward to working among nonelderly household heads and spouses. The law increases marginal tax rates by an average of five percentage points (of employee compensation), on top of the marginal tax rates that were already present before the it went into effect. The ACA’s addition to labor tax wedges is roughly equivalent to doubling both employer and employee payroll tax rates for half of the population.

If you don’t want to read this paper, you can also read his August piece in the New York Times about health-care inflation and the arithmetic of labor taxes. “The Affordable Care Act also creates explicit taxes on employerssubsidies for layoffs and various implicit taxes on employees with many of the same economic characteristics as taxes on employers,” he writes. The piece goes into a discussion he has had with Harvard professor David Cutler about the impact of the law and concludes: “As time goes by and additional research results become available, it increasingly appears that even the experts failed to fully appreciate the labor-market-depressing effects of the Affordable Care Act at the time it was passed.” (He also has a blog post on this issue here, and one here, called “Taxing employers and employees.”) 

The second article, a sister piece to the one mentioned above, looks at the difference in projected costs between Obamacare and the 2006 Massachusetts health-care reform (a.k.a Romneycare). He finds that the Obamacare is projected “to add about twelve times more to average labor income tax rates nationwide” than Romneycare added in Massachusetts after its passage. He explains why:

The rate impacts are different between the two laws for several reasons, especially that: the populations subject to the two laws are different, the Affordable Care Act’s employer penalty is an order of magnitude greater, before either reform Massachusetts had already been offering more means-tested and employment-tested health insurance assistance than other states had, and the subsidized health insurance plans created by the Massachusetts reform were less substitutable for employer-provided insurance than are the subsidized plans to be created nationwide next year.

The piece has lots of very useful imformation about Romneycare. For instance, it reminds us that the Massachusetts law has ”two types of employer penalties — a penalty of $295 per full-time-equivalent employee . . . per year for large employers who fail to offer health insurance and make a fair and reasonable contribution toward premiums. Unlike the ACA’s employer penalty, Romneycare’s $295 is deductible from the employer’s federal business taxes.” The whole thing is worth reading.

Finally, you should check out this interactive, state-by-state map created by the Manhattan Institute’s Avik Roy and his colleagues, which shows how Obamacare affects insurance rates where you live. One of the many surprises in their work is that, less than four weeks away from the launch of the insurance exchanges “the relevant governmental agencies have only made public the insurance carrier filings for 13 states and the District of Columbia. In other words, we’re still waiting for important information on health insurance premiums from nearly three-fourths of the states.”

In terms of changes in premiums, here are their two biggest surprises:

Most observers, myself included, expected Vermont to see rates go down under Obamacare, as more people were forced into the market, and others were subsidized into it. But instead, rates are going way up. 27-year-olds in Vermont will see average increases of 133 percent; 40-year-olds will see hikes of 104 percent; and 64-year-olds will see hikes of 55 percent. We see the same phenomenon, to a lesser degree, in Washington State.

Ohio is a surprise in the other direction. In June, the Ohio Department of Insurance predicted that individual-market rates there would increase by 88 percent. In August, the state announced that premiums would increase by a lower amount, 41 percent. Our analysis finds that Ohio rates will actually decrease by an average of 30 percent.

Roy’s Forbes article with the results is here


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