ACA Lawsuit Would Cut Taxes for the Most Well-Off While Ending Health Coverage for Millions

June 25, 2020: We have updated our analysis of the tax cuts that would result from striking down the ACA. Please see our new report here.

The Trump Administration and 18 state attorneys general are asking the courts to strike down the entire Affordable Care Act (ACA) as unconstitutional. If the lawsuit were to succeed, 20 million people would lose health insurance, and millions more would face higher costs for health insurance or health care.^[1] But there would also be some winners from the lawsuit, because striking down the ACA would cut taxes sharply for the highest-income Americans and certain corporations. In effect, the Administration and the state attorneys general are seeking a massive transfer of income from low- and moderate-income Americans to people on the top rungs of the income ladder.

If the lawsuit were to succeed, 20 million people would lose health insurance, and millions more would face higher costs for health insurance or health care.If their legal position were to prevail:

• Households with incomes over $250,000 for couples ($200,000 for singles) would receive tax cuts worth about $45 billion per year. That roughly equals what low- and moderate-income consumers would lose from cuts to federal health coverage programs in 37 states (including the District of Columbia), where 6.2 million people would become uninsured.
• Most of these tax cuts would go to households with incomes over $1 million, who would receive tax cuts averaging about $46,000 apiece.
• The 1,400 highest-income taxpayers — the 1 in 100,000 households with annual incomes over $53 million apiece — would receive tax cuts totaling about $3.8 billion. That exceeds the ACA premium tax credits for over 600,000 individual market consumers with moderate incomes in 18 states (including the District of Columbia). (See Figure 1.)
• Pharmaceutical companies would pay $2.8 billion less in taxes each year, even as seniors would pay billions more for prescription drugs because eliminating the ACA would reopen the “donut hole” gap in Medicare’s prescription drug benefit.

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Administration Stance in Lawsuit Would Lead to Billions in Tax Cuts

The lawsuit brought by the state attorneys general (Texas v. United States) argues that when Congress eliminated the ACA’s individual mandate penalty (the law’s financial penalty for going without health coverage), it rendered the entire ACA unconstitutional. Legal experts, including conservatives strongly opposed to the ACA, have called that argument “a mockery of the rule of law” and “outright ridiculous.”^[2]

Nonetheless, the Administration took the nearly unprecedented stance of refusing to defend federal law in court. Initially, the Administration urged the courts to strike down the ACA’s protections for people with pre-existing health conditions but leave the rest of the law in place. But following a district court decision striking down the entire ACA, the Administration changed its position, arguing to the Fifth Circuit Court of Appeals that it, too, should strike down the entire law.

Striking down the ACA would end the law’s expansion of Medicaid to low-income adults, eliminate the health insurance marketplaces and premium tax credits that help millions of people afford individual market coverage, and end nationwide protections for people with pre-existing health conditions, as well as a range of other coverage expansions and consumer protections.

It would also eliminate the law’s revenue measures. This analysis focuses on three such provisions, which together comprise the majority of the revenue that the law raises.^[3]

• Medicare tax on high earners. The ACA imposed a 0.9 percent tax on earnings over $250,000 for couples ($200,000 for single filers), with the proceeds going to the Medicare Trust Fund.
• Medicare Net Investment Income Tax. The ACA also imposed a 3.8 percent tax on unearned income (such as capital gains, dividends, taxable interest, and royalties) for couples with income over $250,000 ($200,000 for single filers).
• Pharmaceutical company fee. The ACA imposed a $2.8 billion annual fee on pharmaceutical companies, allocated based on their sales of brand-name drugs.

Lawsuit Would Transfer Income from Low- and Moderate-Income People to High-Income People

The ACA used revenue raised from taxes on high-income people and corporations to help pay for Medicaid expansion to low-income adults and premium tax credits that help moderate-income people afford individual market coverage. (Premium tax credits are available to people with incomes between 100 and 400 percent of the federal poverty line, or about $25,000 to $100,000 for a family of four.)

Striking down the ACA would thus transfer billions of dollars each year from low- and middle-income people (who would lose subsidized health coverage) to high-income households and corporations (which would receive large tax cuts).

• Households with incomes over $250,000 for couples ($200,000 for singles) would receive tax cuts worth a total of about $45 billion.^[4] That amount roughly equals what low- and moderate-income consumers would lose from cuts to federal health coverage programs in 37 states (including the District of Columbia), where 6.2 million people would become uninsured.^[5]

  Table 1 compares the value of the tax cuts, total premium tax credits, and federal cost of the ACA coverage provisions by state.^[6]

• Households with incomes over $1 million would receive tax cuts totaling roughly $34 billion. That amount exceeds what low- and moderate-income consumers would lose from cuts to federal coverage programs in 33 states (including the District of Columbia), where 4.5 million people would become uninsured. (See Figure 2.)

  Annual tax cuts for this group would average about $46,000 apiece. That’s roughly equal to premium tax credits for seven marketplace consumers or the federal cost of Medicaid expansion coverage for eight adults.^[7]

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• The highest income 0.001 percent of tax filers — that is, the 1,409 households with incomes over $53 million apiece — would receive tax cuts worth a total of about $3.8 billion. That amount exceeds the total value of premium tax credits for over 600,000 people in 18 states (including the District of Columbia).

  Annual tax cuts for this group would average about $2.7 million apiece.^[8]

Striking down the ACA would also transfer billions of dollars from seniors to pharmaceutical companies. Eliminating the ACA’s branded drug fee would cut taxes for pharmaceutical companies by $2.8 billion each year. At the same time, at least 5 million seniors would pay at least $1,000 more per year, on average, for prescription drugs because eliminating the ACA would reopen the Medicare “donut hole”: a range of beneficiaries’ drug spending where the Medicare prescription drug benefit initially provided no coverage, requiring beneficiaries to pay 100 percent of the costs.^[9] The ACA gradually eliminated the donut hole.