Weekly Standard

Hidden Spending

Jeffrey Anderson on how Obamacare tried to hide federal spending

(Adrianna Williams/Getty Images)
(Adrianna Williams/Getty Images)

Obamacare has raised Americans’ health-insurance premiums, sapped their liberty, caused millions to lose their doctors, and funneled huge amounts of power and money to Washington. It has become a vehicle for executive lawlessness​—​a federal judge recently ruled the Obama administration has been violating Article I of the Constitution by giving insurers monies that Congress never appropriated. But that's not the only chicanery involving funds paid to insurers. Largely unnoticed, the architects of Obamacare have invented a new way to hide federal spending.

In addition to dumping people into Medicaid, Obamacare functions by having the federal government send billions of dollars in direct payments to insurance companies. Taxpayers pay this money to the federal government, and the government then pays it to insurers. By any normal definition of the terms, the money coming in constitutes revenues, and the money going out constitutes outlays.

Under Obamacare, however, the government is obscuring large sums of federal spending by labeling these direct subsidies to insurance companies "tax credits." Not only is the government hiding billions of dollars in spending, it is counting these hidden expenditures as tax cuts.

The strange thing about these so-called tax cuts is that when money is funneled to an insurance company, it doesn't actually lower anyone's taxes. Take a family whose income-tax burden is $5,000. If that family is eligible for a $5,000 Obamacare subsidy and picks an insurance policy with a $5,000 annual premium, the government sends $5,000 directly to the insurer, and the family pays the insurer nothing. That family, however, will still owe $5,000 in income taxes. If they don't have any income taxes deducted from their paychecks throughout the year, they will have to pay $5,000 in taxes on April 15​—​the same amount they would have to pay if Obamacare didn't exist. Yet the government says Obamacare has somehow given this family a $5,000 tax cut. Meanwhile, the $5,000 that the government paid to the insurer isn't counted as government spending​—​it is counted as money that the government, theoretically, never received.

That's how Obamacare is hiding some $104 billion in federal spending over a decade (the portion of Obamacare's direct payments to insurers that the Congressional Budget Office counts as tax cuts).

Calling Obamacare's direct payments to insurance companies "tax credits" runs contrary to the government's own definition of tax credits. Genuine tax credits go to actual taxpayers. The Government Accountability Office defines a "tax credit" as an "amount that offsets or reduces tax liability." But Obamacare's payments to insurers don't offset or reduce anyone's taxes. The GAO also says a tax credit is a "tax expenditure," and it defines the workings of a tax expenditure as follows: "Rather than transferring funds from the government to the private sector, the U.S. government forgoes some of the receipts that it would have collected, and the beneficiary taxpayers pay lower taxes than they would have had to pay." But when an insurer receives a direct subsidy under Obamacare, the government does transfer funds to the private sector, it doesn't forgo receipts it would have collected, and the "beneficiary taxpayers" don't pay lower taxes than they would have had to pay.

In other words, Obamacare's direct subsidies to insurance companies aren't tax credits​—​which means the federal government is underreporting the next decade's outlays by over a hundred billion dollars and underreporting tax receipts by the same amount.

Liberals may not care about the distinction between increasing government spending and lowering people's taxes, but conservatives should. Unfortunately, rather than confronting this false accounting, many Republicans seem eager to follow suit. Some have envisioned Obamacare alternatives featuring the same sort of faux "tax credits" because they help the proposals secure good CBO scores.

Democrats and some Republicans argue that Obamacare's subsidies are legitimate tax credits because one could choose to take them as such​—​that is, one could choose to pay full freight to an insurer and then take a tax credit at the end of the year. Let's allow that when that happens​—​which is almost never​—​the recipient truly is receiving a tax credit, and this is correctly scored as such. But what if someone chooses, as almost everyone in the program does, to have his subsidy sent directly to an insurance company? Some argue it remains a tax cut. But how? You can't direct a tax cut to someone else; you can merely direct an amount of the same value to be paid to someone else. The insurance company isn't getting a tax cut, it's getting a government payment. Nor are most Obamacare consumers getting tax cuts. They're just having money spent on their behalf.

If not confronted, this false labeling of federal outlays as "tax credits" stands to create a notorious precedent. It's a novel way to mask any federal spending that is tied to a particular taxpaying individual. Under the same rationale used for Obamacare, for example, there's no reason why all outlays under Medicare, up to the amount that a given senior pays in income taxes, couldn't be labeled "tax credits"​—​and hence "tax cuts"​—​rather than spending. Likewise, there's no reason why the government couldn't provide "free" college tuition via "tax credits," shifting dollars from the Treasury directly into university coffers, while disguising much of the spending. The list is endless.

It's bad enough Obamacare is ruining medicine​—​that damage can be undone through repeal and replacement. It shouldn't also be allowed to ruin government accounting practices and mask huge sums of federal spending.