Strange Work Incentives Of The ACA

See The Economic Consequences of the ACA Notch by Aaron Yelowitz of Cato. Excerpt:

"Third, there are “mini ACA notches” as income exceeds certain multiples of the Federal poverty line. As the 64-year-old individual earns the extra $1 in Georgia that raises income from $15,521 to $15,522 (133% of the Federal poverty line), the subsidy falls by $157. Fourth, once income exceeds 400% of the Federal poverty line, the subsidy disappears entirely. For this individual, that entails a loss of subsidy of $6,621 from earning the extra $1 that takes income from $46,679 to $46,680. This notch is also present in Tennessee, but to a smaller extent. Finally, in all cases we can see the subsidy typically erodes quite smoothly as income goes up – this is known as a benefit reduction rate or tax rate. As income increases by $33,000 from $12,000 to $45,000, the PTC falls by $4,061, resulting in an average tax rate of 12.3% just from the ACA. For the younger individual, the subsidy erodes to $0 before income reaches 400% of the Federal poverty line in both Georgia and Tennessee.

How do things look for married couples? Much like single individuals, the subsidies kick in and turn off at multiples of the Federal poverty line. Although the unsubsidized cost of a health insurance plan for two 64-year-olds is twice that of one 64-year-old, the dollar amounts for the poverty thresholds are quite different. The dollar amounts go up less than proportionally with family size. As a consequence, the notches look quite different – and in some cases are jaw-dropping – for a married couple. Consider the two areas we just considered, and assume that two individuals of the same age are married to each other. The first column in the next table shows that the ACA notch when reaching 100% of the Federal poverty line (of $15,731) is an incredible $21,850! That is, earning the extra $1 that brings income from $15,730 to $15,731 leads to a dramatic increase in the premium tax credit. The magnitudes are clearly different, but present, for all family types illustrated. As family income goes from $15,731 to $62,919 (or 100% to 400% of the Federal poverty line), for all couples, the subsidy more-or-less is smoothly taxed away (and in, fact, the young couple in the inexpensive market loses its subsidy before 400% of the Federal poverty line). For the first couple, as income goes from $18,000 to $60,000, the PTC falls by $5,374, resulting in an average tax rate from the ACA alone of 12.8%. The notch for older couples is dramatic at 400% of the Federal poverty line; in Clay County, GA, earning the extra $1 that takes income from $62,919 to $62,920 results in a loss of subsidy of $16,152! The results in Tennessee are also large, but not nearly as large as Georgia. In Tennessee, the older couple only loses $6,275 for earning the extra $1. Younger couples don’t completely escape this punitive tax. For younger couples, the ACA notch exists in Georgia, but the PTC is eroded completely in Tennessee before income reaches 400% of the Federal poverty line, so there is no ACA notch.

How would such incentives affect the labor market? Abstracting away from other taxes and transfers, these notches create incentives in all cases to reach the earnings threshold of 100% of the Federal poverty line in order to qualify for subsidized health insurance. Moreover, there are very strong incentives to not exceed 400% of the Federal poverty line, especially because you must repay all of the premium tax credit. In states that did not expand Medicaid, the first effect – the incentive to raise earnings above 100% of the Federal poverty line – is present, but isn’t in states that expanded Medicaid. In all 50 states and DC, the second ACA notch at 400% of the Federal poverty line will be present, to larger or smaller degrees depending on health premiums and age. The larger the ACA notch, the greater the incentive to constrain earnings under the second threshold."