CBO Confirms Detrimental Impact of the Health Care Law on Labor Market Performance

The CBO released its summer update this morning and in it (see pages 48-49) we find confirmation on a paper released by the American Action Forum in May called Labor Markets and Health Care Reform: New Results. We found that the Patient Protection and Affordable Care Act (PPACA) will have profound implications for U.S. labor markets. Namely, higher labor taxes and incentives to drop employer-sponsored health insurance for as many as 35 million Americans. This drop would lead to widespread turmoil in labor compensation. As low-income workers are forced onto the exchanges, the already high effective marginal tax rates will be exacerbated. 

CBO indicates:

• The health care law, on net, will reduce the amount of labor used in the economy by a small amount, roughly half a percent, primarily by reducing the amount of labor that workers choose to supply.
• The expansion of Medicaid and the health insurance subsidies will encourage some to work fewer hours or to withdraw from the labor market entirely. 
• The phaseout of the subsidies as income rises will effectively increase marginal tax rates, discouraging work.

From our May paper:

• The effective marginal tax rate is the answer to the question: “If I earn $1 more, how much less than $1 do I get to save or spend?” If you can keep that full dollar for your disposal, the effective marginal tax rate is zero. If earning another dollar does not raise your disposable income by even a penny, the effective marginal tax rate is 100 percent.
• The chart below shows the EMTRs for a two-earner family with two school-age children, one of whom is in college. One line is the EMTR based on income tax law prior to the PPACA, while the second displays the damaging increases in the EMTR from the phase-outs in the EMTR. As a family’s income rises above 133 percent of FPL, they will receive their subsidy to purchase health insurance in the exchanges. In turn, however, as their efforts yield higher income, subsidies are clawed back or effectively taxed away. The current law policies show that there are already some lower income families facing EMTRs above those in the middle class. But the barrier to success imposed by PPACA is even more striking.
• Thus, for every additional worker that faces a loss in employer coverage we have an additional worker who faces a greater difficulty in getting ahead when taking an extra shift, finding a way for a second parent to work, or investing in night school courses to qualify for a raise. Additional work will mean handing the government as much as 41 percent of the additional income earned. The bigger the EMTR, the higher the hurdle to moving up.