The Challenges of Implementing Health Reform Through the Tax System Janet Holtzblatt Congressional Budget Office February, 2008

New Responsibilities for IRS? 1.Limit existing subsidies for employer-based insurance. 2.Subsidize taxpayers who buy non-group insurance. 3.Subsidize individuals who have no income tax liabilities. 4.Subsidize small businesses. 5.Enforce mandates (or personal responsibilities). 6.Require agency, other than IRS, to collect premiums.

Possible Reasons to Use IRS Builds on existing tax preferences. Most people file returns. Access to information on income. May complement tax policy goals.

3 Big Challenges Can the targeted population be reached? Can IRS enforce either a mandate or eligibility rules for a subsidy? Can IRS enforce mandates or pay out subsidies in a timely fashion?

1. Can the Targeted Population be Reached? A. Non-Filers

1.Can the Targeted Population be Reached? A. Counts of Filers and Non-Filers in 2007 (Source: JCT; Counts in Millions) Tax Units with Zero Income Tax Liability FilersNon- Filers Total Wage or self- employment income No wage or self- employment income Total

1. Can the Targeted Population be Reached? A. Addressing the Non-Filer Issue Require non-filers to file income tax return (2008 stimulus payments) Require non-filers to file a short form (2007 telephone excise taxes) Effectively exempt non-filers from mandate and provide subsidies through other means (most health proposals) Spread responsibilities between agencies

1. Can the Targeted Population be Reached? B. Providing Tax Benefits to Families with No Income Tax Liabilities

1.Can the Targeted Population be Reached? C. Targeting Criteria (General) Income tax return contains information on income and family that could be used to target assistance. Confusion, avoidance, and evasion likely when information incomplete or rules are complicated. –Family structure –Business structure

Can the Targeted Population be Reached? C. Targeting Criteria (Unique to Health Reform) Does individual have health insurance? Is the individual receive another health subsidy? Does the benefit package meet requirements? Did employer drop coverage prior to eligibility for subsidy? What is the value of employer contributions and do they exceed cap?

Challenge 2: Can Tax Rules be Verified and Enforced? 2a. Information Reporting (IRS) Extent of information reporting Net Misreporting % Wages (withholding + W-2s)1.2 Interest, dividends, social security, pensions, and UI (1099s) 4.5 Partnerships, S-Corps, exemptions, cap gains, and alimony (some reporting) 8.6 Self-employment income (none)53.9

Challenge 2: Can Tax Rules be Verified and Enforced? 2b. Challenges for Information Reporting Certifying qualifying plan Accelerating timing Receiving information from state programs

Challenge 3: Can Subsidies be Paid in Real Time? 3a. Determining Eligibility (EITC Experience) Criteria –anticipated annual income –marital status on 12/31 –number of months lived with child Reconciliation when file return at end of year Outcomes –3 percent choose advance payment option –40 percent of advance claimants do not file –about 2/3 of those who file misreport advance payments

Challenge 3: Can Subsidies be Paid in Real Time? 3a. Using Prior Year Income to Determine Eligibility Advantages –Reduces uncertainty –Reduces risk Disadvantages –Loss of target efficiency –Reporting and verification lags reduced, but not eliminated

Challenge 3: Can Subsidies be Paid in Real Time? 3b. Does IRS Have Ability? (HCTC Experience) Criteria –Eligibility for HCTC monitored monthly –Must purchase insurance first before becoming eligible –Credit recipients pay premiums to IRS IRS pays full amount (subsidy plus recipient’s contribution) to insurer Outcome –Participation appears to be low –IRS outsources tasks to private sector

Conclusions Can the IRS meet the three challenges? Balance targeting and simplicity. Information, information, information. Making recurring payments is difficult with current infrastructure.