Tax Man Cometh: Obamacare Subsidies Pose Risk for Millions of Tax Filers

Posted on by Patrick Ishmael

Millions of Americans buying insurance in the Obamacare marketplaces could be in for a rude awakening when 2016 rolls around. For one, the cost of insurance in the exchanges is set to rise across the country, in some cases by double digits; in Missouri, for example, insurer Coventry has already asked for a whopping 29% hike on some of its individual insurance products.

But the pain may not hit customers in the price tag alone. Indeed, many Obamacare insurance purchasers are subsidized by the government on the basis of their income, meaning that even when the price of insurance goes up, those consumers usually don't bear the brunt of the hike—the taxpayers subsidizing them do.

At least, that's how it's supposed to work.

According to an update on Obamacare that the IRS recently sent to Congress, out of the 4.5 million taxpayers who got Obamacare's "advance payment" subsidies last year, only 2.7 million had filed the required tax forms as of the end of this May.

The rest filed for an extension (360,000), haven't filed at all (710,000), or didn't submit (760,000) the new ObamaCare form—Form 8962—that's required to make sure they got the right subsidy amount.

These 1.8 million taxpayers actually represent 2.8 million individuals, according to the IRS, because one taxpayer can file on behalf of his or her spouse and children.

In other words, taxpayers who have not filed the proper paperwork for their subsidies—or those whose income has moved them out of the subsidy range—might not only lose that money next year, but also have to return subsidies they have already received incorrectly. And in case you were wondering whether the government would really demand subsidy money back, rest assured: it's already happening. Not only could subsidized consumers see hikes in their insurance rates for insurance they're now forced to buy, but they could suddenly experience those costs without the financial insulation that had been provided to them by the government. 

Rather than simplify America's already complicated health care system, Obamacare made it even more complex, and that hurts the poor and those unaware of how this Rube Goldberg–style law operates. That complexity could lead to a new round of negative financial consequences for millions of Americans in the months ahead.

IRS Obamacare Ruling Buffets Some Missouri Graduate Students

Posted on by Patrick Ishmael

College towns are typically bastions of liberalism, and Missouri’s uber-college town of Columbia is no exception. Columbia Tribune reporter Rudi Keller even wrote (tongue-in-cheek) earlier this year about the city and its county “seceding” to create its own state, in part to better cater to the region’s political sensibilities. (How a “state” economy heavily dependent on state spending would survive is, of course, anybody’s guess.)

But even in an aspiring liberal utopia like Columbia, the consequences of overbearing government are still very real. Enter the IRS, two weeks ago.

Graduate students employed by the University of Missouri will have a harder time paying for health insurance after the university told students Friday it is taking away subsidies that help with premium costs.

Associate Vice Chancellor for Graduate Studies Leona Rubin said the change is the result of a recent IRS interpretation of a section of the Affordable Care Act. The law, which requires adults to have health insurance or face tax penalties, “prohibits businesses from providing employees subsidies specifically for the purpose of purchasing health insurance from individual market plans,” the university said in a letter sent to students Friday.

The IRS, Rubin said, considers the university’s student health insurance plan from Aetna to be an “individual market plan.” Because of the IRS classification, the university cannot give graduate students with assistantships a subsidy to help with health insurance costs, Rubin said.

According to Rubin, the University “could be fined $36,500 per student per year” if it continues its health insurance subsidy program…which makes it even more strange that the University apparently restored the subsidies in question last week.

It remains to be seen whether the threatened fine noted by the associate vice chancellor was a paper tiger meant to provide cover for cost cutting on Mizzou’s part or if that enormous fine is still actually on the horizon. The University of Missouri–St. Louis (UMSL), which took similar action in stopping insurance subsidies of its own, is sticking by its original decision to end its program. And it’s part of a national trend, thanks to Obamacare and the IRS. Keep in mind: while Mizzou has reversed its decision, the IRS certainly hasn’t changed its interpretation.

There’s a sad irony involved here, of course, when a university community generally supportive of big government is itself undermined by big government. And there’s lots to criticize: the credibility gap facing Mizzou’s administration, the timing of the announcement, the threatened walk-out by the graduate students, and so on.

But one of the most disturbing elements of this story is how disruptive Obamacare has been to a health care practice that, by most accounts, was working just fine, and the swift manner in which unaccountable federal bureaucrats were able to upend it nationwide. That a law passed 5 years ago is still changing without legislation is great cause for concern—not only for our health care, but for our democracy, as well. This is a teachable moment, but there’s no telling whether Missouri’s universities will learn from it.

City Should Reject Central West End TIFs

Posted on by Joseph Miller

Recently, the Saint Louis Business Journal reported that Koman Group, a real estate developer, plans to add to two apartment buildings to the Central West End. With a total investment of $31 million dollars, these new buildings, which will include apartments along with shop space on lower floors, would be excellent additions to the Central West End. Unfortunately, the developer is requesting that the city grant $6 million in tax subsidies for the project through tax increment financing (TIF).

                TIF is a controversial way of subsidizing development, which we have written about many times before. According to its proponents, it can entice businesses to build in blighted areas that would otherwise remain undeveloped, or conserve historic sites that might otherwise be knocked down. Skeptics of TIF argue that the tool is too often used to subsidize—at the expense of overlapping tax districts—development that would have occurred anyway.

                Whichever view is correct, TIF is almost certainly unjustified in the case of the Koman Group’s proposal. The areas in question are not blighted in any way. I should know, as I currently live across the street from one of the locations and down the street from the other. The proposed building sites, far from being deleterious to the community, are well-maintained properties with active businesses. A new apartment building and Whole Foods is going up in the middle of the block. If these properties can be defined as blighted, any property can be. This is just another example of how a program designed to help downtrodden neighborhoods can be twisted to support luxury developments in booming areas.

                The Central West End has many new apartment buildings, a large source of local employment (BJC Healthcare), and a healthy bar and restaurant scene. It’s time to stop giving tax subsidizes to companies that decide to build there. Koman Group can knock down my nearest dry cleaner and bar if they want, but they shouldn’t get a tax break to do it.

Teacher Survey Makes Case for More Government Employee Freedom

Posted on by Brittany Wagner

Happy National Employee Freedom Week! The American Association of Educators (AAE), a freedom-promoting alternative to the National Educator Association (NEA) and the American Federation of Teachers (AFT), just released its 2015 Workforce & Pension Policy Survey. AAE polled 700 teachers from all 50 states about important issues in education, including labor policy, and found the following:

  • 98% of educators surveyed believe teachers should have the right to choose an association that best fits their needs. Missouri teachers do have this freedom. However, while the teacher may benefit from the professional development opportunities and liability insurance their association offers, teachers don’t have a choice as to who represents them during negotiations over salary and benefits.
  • 68% of members would prefer to negotiate their own contract. Wouldn’t it be nice if a teacher who works twice as hard as other teachers and increases academic achievement more than other teachers could ask for a raise? This is unheard of in education, where 84 percent of AAE members say collective negotiations do little to recognize excellent teachers. No wonder schools have such a difficult time holding onto great teachers! They can’t reward them appropriately.
  • Only 8% of educators surveyed reported ever having participated in a union certification election. That means that an overwhelming majority of teachers surveyed have never had the chance to vote for which union represents them. Can you imagine if you never got the chance to vote for an elected official—state representative, governor, congresswoman—and the elected official stayed in office indefinitely?

Regular union elections ensure that government employees like teachers have the opportunity to vote for the union or professional association that best represents their interests. While education analysts at the Show-Me Institute often advocate for more choice for students, teachers need choice, too. Teachers need the freedom to decide who represents them at the bargaining table. Whether that’s the individual teacher or a preferred association, teachers should have the freedom to choose. 

Incentivizing Unemployment

Posted on by Michael Rathbone

Automation is likely to become more and more prevalent as time goes on, and the fast-food industry is likely to be part of this trend. So it shouldn’t be surprising that McDonald’s is jumping aboard the automation train. If state and local governments mandate higher minimum wages, many more restaurants might be following McDonald’s on the automation express.

McDonald’s’ “Create Your Taste” kiosk allows customers to fully customize their burgers by selecting different buns, cheeses, and toppings without having to interact with a real person. The automation occurring in McDonald’s and other places might be an inevitable feature of the the 21st-century economy, and this has the potential to put many people out of work.

In a purely free market, this is creative destruction. Some jobs are destroyed in the process of delivering increased efficiency. That’s not to diminish the pain of those now out of work; however, it is necessary for the economy to grow. Even though some job losses are inevitable, government should not be expediting the process through regulations. Mandating increased labor costs through a higher minimum wage will encourage employers to use less labor. They instead will substitute other inputs, such as capital, that may have a lower relative cost because of the increase in wages. In other words, if you make labor more expensive, you give employers an incentive to invest in ways to cut down on labor. Forcing employers to pay their lowest-skilled employees more is such an incentive.

Many businesses already have a financial incentive for installing more kiosks like the ones McDonald’s is introducing. According to the Harvard Business Review, “Taco Bell recently announced that orders made via their new digital app are 20% pricier than those taken by human cashiers, largely because people select additional ingredients. Chili’s, after installing self-service tablets, reported a similar increase in dessert orders. Cinemark theater’s new self-service kiosks have ‘had concession spending per person climb for 32 straight quarters.’”

The intention behind raising the minimum wage is presumably to help low-wage workers make more money. However, with this oncoming wave of automation, policymakers might just put these people out of work altogether. Government should encourage work, not mandate that people lose it. 

Bad for Borrowing: Saint Louis Bond Ratings Slip

Posted on by Joseph Miller

Recently, Moody’s, a prominent credit rating group, downgraded Saint Louis’s debt rating.  While the changes are nothing drastic (and the city’s outlook is stable) a lower credit rating may raise the cost of major projects in Saint Louis.

                The recent downgrade saw Saint Louis’s general obligation debt rating fall one notch, from Aa3 to A1. That still leaves the city with a rating denoting an upper-medium investment grade, even if the rating is well below prime. And as some news sources have pointed out, that means Saint Louis’s rating is higher than Chicago’s or Detroit’s. Unfortunately, if we don’t compare Saint Louis to cities exiting or very likely entering bankruptcy, its rating is relatively low, as the chart below demonstrates:

City

2015 General Obligation Debt Rating

Oklahoma City

Aaa

Indianapolis

Aaa

San Francisco

Aa1

Minneapolis

Aa1

Phoenix

Aa1

Seattle

Aa1

Dallas

Aa1

Portland

Aa1

Atlanta

Aa2

Memphis

Aa2

Washington, DC

Aa2

Kansas City

Aa2

Houston

Aa2

Baltimore

Aa2

New York City

Aa2

Nashville

Aa2

Denver

Aa2

Cleveland

A1

Saint Louis

A1

San Diego

A1

Philadelphia

A2

Detriot

A3

Chicago

Baa2
 

               

                A lower bond rating can lead to higher borrowing costs. In the same way that an individual with a low credit score might have to pay higher interest rates on a car loan or a mortgage than someone with a great credit score, a lower rating for a city can mean it has to pay more to borrow. As cities regularly borrow money to make civic improvements, the higher cost of borrowing means residents pay more for large projects like, say, a football stadium. Speaking of stadiums, the rating for nonessential debt (read: convention center and stadium) issued by the Saint Louis Municipal Finance Corporation was also downgraded, to A3. That corporation would responsible for issuing bonds for a new stadium.

                The primary reason for Saint Louis’s weak credit rating is the city’s “weak socioeconomic profile,” which is admittedly difficult for city leaders to fix. However, there are ways city hall could work to increase the city’s bond rating. According to Moody’s, the city is too reliant on the earnings tax. In addition, the city could boost its rating by making an effort to reduce total debt. Unfortunately, with the city prepared to go even further into the red to build a billionaire a new football stadium, it may be a while before Saint Louis can brag about its credit rating to people who don’t live Chicago. 

SMI Responds to PSRS on Teacher Pension Fund Risk

Posted on by James V. Shuls

One of the core purposes of the Show-Me Institute is to promote transparency at all levels of government. We think this is critically important for Missouri’s public employee pension systems, and in recent years we have committed substantial time and effort to exploring the issues confronting these systems. 

Most recently, Michael Rathbone and I pointed out that Missouri’s teacher pension systems have shifted to riskier assets. From this study, we concluded that lawmakers “should be aware that these pension plan returns are based on increasingly risky assets and acknowledge that fact when planning for the future.” In particular, we suggested that the plans should forecast assets based on various expected rates of return.

On August 7, PSRS Executive Director M. Steve Yoakum issued a three-page response to the paper. Mr. Yoakum claims that our study “provides a limited and somewhat biased view of PSRS/PEERS and the Systems investment strategy,” but in the rest of his response he acknowledges several of the points we made.

Mr. Yoakum acknowledges the shift away from fixed-income investments and toward higher-risk investments, and goes on to justify this shift by citing lower returns on the former and greater opportunities “in other areas of the investment universe.” This is essentially the point we were making: equities and alternative investments have historically delivered higher returns than fixed-income investments, but they also carry greater risk.

Our paper states that current teacher and school district contributions do not cover the existing obligations, meaning that pension plans must rely on investment returns in order to meet their obligations to members. Mr. Yoakum’s response: “Only if we exclude income from investments is this true.” It is difficult to describe this as anything but a restatement of our point.

We stated, and Mr. Yoakum’s response acknowledges, that public employee pension systems have moved toward riskier assets than they held in the past. Much of Mr. Yoakum’s response is devoted to explaining this change—which is important— but the point of our paper was not to question the reasons behind the shift. Our goals were instead to document this trend and to endorse the recommendations of the Pew report that we cited repeatedly in our own study, namely that “Government sponsors can demand better reporting of future expected costs and the associated downside risks, and then use this information to make decisions about ways to deal with poor outcomes, should they occur.”

We remain committed to these recommendations, and we stand behind every word in our study. 

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