Obamacare has only gotten passing attention this election season, but it is likely to return as a hot topic early next year. That is because during the 2015 tax filing season, millions of low- to moderate-income taxpayers will likely first learn that they exceeded the income eligibility levels for the Obamacare subsidy they received in 2014 and will need to repay the government. This repayment could result in a sufficiently abrupt and targeted reduction in consumer spending that could delay the Federal Reserve from starting to raise short-term interest rates, which the consensus view expects to occur in March, coincidentally contemporaneous with when this looming "consumer cliff" hits.
The Obama administration says 7.3 million Americans are participating in the Obamacare insurance exchanges and 87 percent, or 6.4 million people, are receiving some form of subsidy. This subsidy is not paid directly to them, but is paid by the government to the health insurers. The subsidy income eligibility levels depend on one's age and whether they have an individual or family plan, but are roughly $35,000 for younger individuals, $46,000 for older individuals, and $94,000 for a family of four.
To gain a subsidy, an Obamacare enrollee provided relevant 2013 tax information when they signed up for Obamacare during the open enrollment period. There are several ways a person's taxable income could increase in the ordinary course of life, such as by getting a raise, a spouse returning to the workforce, or gaining a tax credit due to the birth of a child, just to name a few examples. If a subsidy recipient's income level has changed sufficiently over the course of 2014 that it now exceeds the eligibility caps, they are required to self-report the change to stop receiving the subsidy and determine the amount they need to repay the government. Otherwise, they will have their tax refund reduced next year, or worse, might even owe a tax penalty.
Based on a simple regression analysis, we expect the average tax refund next year to be $2,550. And based on conservative estimates, we project the average subsidy repayment to be $1,000. But the real concern is the extent to which we believe this issue will be relevant for the segment of the population that relies most heavily on their annual tax refund – between 1.1 million and 3.3 million subsidy recipients are likely to have to repay at least a portion of their subsidy. Thus, low- to moderate-income people in the aggregate will be hit with a $1.1 billion to $3.3 billion reduction in consumer spending power next spring. In the aggregate, this is immaterial to total tax refunds, which last year totaled almost $270 billion. But it will likely be very material to the specific group of Americans about whom Fed Chair Janet Yellen is most concerned.
Even if the Fed does not delay increasing interest rates because of this consumer cliff, specific companies will bear a disproportionate adverse impact of the targeted dropoff in consumer spending. If an individual has ramped up purchases during the holidays on credit expecting to pay down their debt with their tax refund, as low- to moderate-income individuals tend to do, they are in for a rude awakening when they sit down with their H&R Block tax preparer (who, as an aside, is likely to benefit from the increased flow of clients thanks to Obamacare's new requirements). Upon learning of their misfortune, these people are unlikely to dine out at places like Applebee's or go shopping as much at Wal-Mart or Dollar General in the following quarter or two.
When we asked a former senior Obama administration official last week how they view this problem, he said that while it would produce a temporary economic "blip," the upside is that anyone impacted is now making more money than they were before. While this is true from a macroeconomic vantage, it's not practical from a real world perspective. These people are, for the most part, living month-to-month, paycheck-to-paycheck, and are unlikely to be excited when they find out that their tax refund is 40 percent less because they made more money than they did last year. Many people psychologically view their tax refund as another form of bonus rather than a tax-free loan to the government.
The same former official said that the real concern was the nearly 500,000 current subsidy recipients who the government required to provide additional information at the end of September to verify their citizenship or their income or risk repaying their subsidy and losing their insurance coverage as well, all of whom we do not even consider in the scope of our analysis. Additionally, it's worth noting that our estimates for the magnitude of the consumer cliff will be further compounded by the individual mandate penalty, which will result in some large subset of 43 million uninsured people having to pay the higher of $95 per plan participant (up to $385 per family) or 1 percent of their taxable income.
If you think that Americans were upset with Obamacare when the rollout of the website was a disaster last December or they received a notice a year ago that their plan was being canceled, just wait to see how millions of people feel when they find out they are not getting the tax refund they were expecting. The former Obama administration official is probably right that the negative macroeconomic impact of the consumer cliff will be limited to just a few months, but the adverse political impact for President Obama's legacy very well could be permanent.
Commentary by Stephen A. Myrow and Brandon R. Barford. Myrow is managing partner of Beacon Policy Advisors LLC, an independent policy research firm based in Washington, DC, and served as Chief of Staff to Deputy Secretary of the Treasury Robert M. Kimmitt in 2008-2009. Follow him on Twitter @smyrow.
Barford is a partner of Beacon Policy Advisors LLC, and served as a professional staff member on the Senate Committee on Banking, Housing, and Urban Affairs in 2006-2009. Follow him on Twitter @BrandonBarford.