If You Don’t Buy Insurance, Will You Really Pay the Tax?

By Joseph Antos and Michael R. Strain 

Generally speaking, if you owe the IRS, it will get the money from you—with the possible exception of the ObamaCare tax.

Now that the Supreme Court has decided that ObamaCare’s mandate to buy health insurance is a tax, will the IRS be able to collect it?

Generally speaking, if you owe the IRS, it will get the money from you—with the possible exception of the ObamaCare tax. Though ObamaCare’s individual mandate imposes a tax on people who do not purchase government-approved health insurance, the law explicitly neuters the IRS’s ability to collect the tax.

Bizarre? Yes. And it matters. If policymakers expect uninsured young people to buy health insurance when it is even more expensive than it is today, the threat of serious consequences for not doing so must be real. Yes, the threat that the IRS might come after you if you do not do what you are told looks real at first glance. But Democratic politicians, fearing public backlash for making the mandate too intrusive, pulled its teeth.

First, the tax (nee penalty) is too small to matter to the people who are its target. In 2014, the tax will be the larger of $95 or 1 percent of taxable income for an individual. By 2016 it rises to $695 or 2.5 percent of income. Young people would not want to pay a dollar if they could avoid it, but avoiding the tax means signing up for insurance that many do not think they need. That insurance is not free. Even with subsidies, they will pay at least 3 percent of their incomes for premiums and up to 6 percent of the cost of the insurance in deductibles and copayments. That adds up to a lot more than 95 bucks.
Second, the law counts on most of the scofflaws turning themselves in. If you do not have insurance and think you owe the tax, then you will be asked to check a box to that effect on your tax return. If you choose to ignore the mandate, you might also choose not to check the box. But even those who do confess that they do not have insurance may not be liable for the new tax. Illegal aliens, Native Americans, prisoners, those who are without insurance for less than 3 months, those who do not have to file an income tax return, anyone who faces a hardship or cannot find affordable coverage, and others are all exempt.

Even with subsidies, young people will pay at least 3 percent of their incomes for premiums and up to 6 percent of the cost of the insurance in deductibles and copayments.

Third, the law requires the IRS to sift through 140 million income tax returns to track down the few scofflaws who are actually liable. This requires collecting information from both the insurance companies and the individual filers in an expensive feat of bureaucratic detective work. What are the specifics? The details of any plan other than taking your word for it have not been worked out yet, but the likely scenario finds insurance companies sending documentation to the IRS and to the taxpayer, which the taxpayer would then include with his return. That means even more bureaucracy and regulatory burden than the healthcare industry and the IRS currently have. And more bureaucracy and regulation mean greater expense, both to insurers (who will pass those costs to consumers in higher premiums) and to the government.
Taking all parts of ObamaCare together, the IRS is expected to spend $881 million from 2010 through 2013 on thousands of new workers and upgrades to computer systems—amazing, since the bulk of ObamaCare does not even go into effect until later years.
Finally, even if the IRS has determined that you owe the new tax, it has very limited ability to force you to pay it. Basically, the IRS has two options: To ask you for the money and to reduce the size of your tax refund. But the IRS cannot reduce your refund unless you overpay. Since taxpayers have great control over their withholding, a savvy taxpayer who does not want to buy insurance could easily work the system to ensure that the IRS could not hold back his refund to enforce the mandate tax. And half of American households do not owe any income tax to begin with, so good luck getting the money from them. In addition, with electronic filing, the IRS may have already sent you the full refund before they’ve figured out that you owe the ObamaCare tax. All in all, it could take years for the IRS to collect its money.
This contrasts sharply with the way the IRS collects other taxes. To put it simply, the IRS gets the money it is owed because it has broad powers to enforce compliance. After all, there’s a reason we’re all scared of the IRS.
To enforce tax compliance, the government can bring a lawsuit against you, but that option is generally reserved for the most serious tax evaders—not individuals who owe a $695 penalty. In contrast, the ObamaCare law says that anyone who does not have health insurance and fails to pay the tax cannot be criminally prosecuted or criminally penalized. There goes the government’s strongest weapon.

Even those who do confess that they do not have insurance may not be liable for the new tax.

What happens most of the time is very simple: If you refuse to pay your taxes, then the government takes your stuff. The government can take all the assets you currently have and assets you expect to receive in the future. For example, the money you have in your checking and savings accounts, your car, your boat, your retirement account, any rental income, and wages that have not been paid to you can be taken by the IRS in order to collect the money you owe. The IRS’s power is so strong that it holds third parties liable if they choose not to surrender property that the IRS demands. So your bank has to comply with the IRS.
Not so if the tax you refuse to pay is the ObamaCare tax. Under ObamaCare, the IRS cannot seize any of your property to enforce the mandate penalty. The IRS cannot go after the money in your bank accounts, and it can’t sell your car. It can’t send you to jail, and it can’t touch your stuff.
Congress has enacted a law that cannot be enforced. Congress purposely limited the enforcement powers of the IRS to avoid the public outcry that a strong mandate to buy government-approved insurance would evoke. The mandate may be constitutional, but as Chief Justice Roberts pointed out, a constitutional law is not automatically good policy.
The government’s inability to enforce the individual mandate is just one of many problems with ObamaCare. Mandate or not, laws should be enforceable, and they should be reasonable. This law has to go. The American public should turn the tables on the government and enforce a mandate of its own: Create and execute reasonable health policy.
Joseph Antos is the Wilson H. Taylor Scholar in Healthcare and Retirement Policy at the American Enterprise Institute, where Michael R. Strain is a research fellow.