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Affordable Care Act Still Reduces Deficits, Despite Tax Repeals

The Affordable Care Act (ACA) remains likely to reduce federal budget deficits substantially in coming years, despite December’s repeal of three ACA taxes. Repealing the excise tax on high-cost health plans (the “Cadillac tax”), the fee on health insurance providers (the “health insurance tax”), and the medical device excise tax will sacrifice hundreds of billions in revenues and marks a significant step backwards in health and fiscal policy, as we’ve written. But the ACA’s remaining spending reductions and tax increases will more than offset the cost of its coverage expansions.

While it’s impossible to construct a precise new estimate of the ACA’s effects on deficits, adjusting earlier Congressional Budget Office (CBO) estimates for later changes provides a good guide. We start from CBO’s 2015 estimate of the budgetary effects of repealing the ACA. Although the effects of enacting the ACA aren’t simply the opposite of repealing it, the 2015 estimate is the most recent comprehensive one available.

CBO estimated that the ACA would reduce the deficit in 2025 — the last year of its analysis — by $118 billion, or by $98 billion after accounting for macroeconomic feedbacks (i.e., the law’s impact on the economy). Repealing the three ACA taxes will cut revenues by just over $40 billion that year, still leaving roughly $55-75 billion in deficit reduction. The adjusted estimate also shows deficit reduction growing rapidly in the latter years of the ten-year budget window, even without the three repealed taxes.

Other adjustments go both up and down. Projected federal subsidies to help people afford marketplace coverage have dropped since 2015, for example, partly because the 2017 tax law repealed the penalty for not complying with the individual mandate to get health insurance. In addition, CBO’s 2015 estimate leaves out roughly $15 billion in annual savings from ACA Medicare payment reductions that policymakers likely wouldn’t roll back even if they repealed the ACA. In the other direction, estimated receipts from employer penalties for not offering their employees coverage that meets certain minimum standards have declined, and the 2018 repeal of the Independent Payment Advisory Board has slightly increased projected Medicare costs.

So, one should use the estimates with caution. Estimating the ACA’s budgetary effects has become “more challenging and less meaningful” as time has passed, according to CBO, since it’s impossible to track the effect of many individual provisions. That’s why CBO stopped producing such estimates several years ago.

Nonetheless, all in all, the ACA will likely reduce the deficit by at least $55-75 billion in 2025 and by more each year of the following decade.

That’s not surprising. Despite claims that it relied on budget gimmicks, the ACA — as enacted — far more than paid for itself in coming decades. In the decade from 2026 to 2035, it would have reduced the deficit by around 1 percent of gross domestic product (GDP) or several trillion dollars, with or without macroeconomic feedback, according to CBO’s 2015 estimate. While the revenue from the Cadillac tax would have grown considerably faster than GDP after 2025, the revenue lost from repealing it and the two other ACA taxes is substantially smaller than the projected savings.

In sum, assertions that the ACA is making deficits larger are inaccurate. Even without the repealed taxes, the law’s Medicare payment reforms, Medicare taxes on high-income people, and other savings will more than cover the cost of extending health coverage to tens of millions more Americans.