IRS overpaid Obamacare tax credits by nearly $3.5 billion in 2017

The IRS overpaid nearly $3.5 billion in Obamacare tax credits last year that it cannot recoup because of constraints built into the program, frustrating Republicans who have failed to repeal the health care law but say that money could have been spent on programs for veterans or infrastructure.

A Treasury watchdog said the government paid out roughly $24 billion in Obamacare subsidies in the heart of the 2017 tax-filing season, with $5.8 billion in overages. Of that, just $2.3 billion was clawed back, leaving $3.5 billion in outstanding excess payments.

“The overpayments were that much?” said Rep. Phil Roe, Tennessee Republican.

He said he is trying to expand an assistance program for older veterans and their caregivers. “I can think of a lot of things I can use $3.5 billion dollars for,” he said.

Most Obamacare exchange customers receive taxpayer-funded subsidies to help cover their premiums.

The amount they receive is based on their expected earnings. At the end of the year, they are supposed to reconcile what they anticipated with what they actually earned. Because some received higher incomes — through raises, promotions or better jobs — they have to repay the IRS.

But authors of the 2010 law were afraid that the threat of a big tax bill would discourage people from buying Obamacare coverage altogether, so they set limits on the amount of money the government could claw back.

Those limits have been tweaked over the years because Congress feared it was giving away unearned money.

The $3.5 billion figure told lawmakers that they are still leaving a lot of money on the table. The 2017 figure is more than five times the number from 2015, which was the first tax year after Obamacare was fully operational.

Assuming similar overages for the rest of the decade, the $35 billion would be more than enough to pay for President Trump’s border wall trust fund, with money left over to cover an anti-opioid effort.

“That begins to get to be a lot of money,” said Energy and Commerce Committee Chairman Greg Walden, Oregon Republican.

Douglas Holtz-Eakin, a former Congressional Budget Office director, said he is not sure why the amounts spiked in the latest reported year, though it might be because of income growth. In other words, people underestimated their income before their earnings rose in a good economic climate, so they received more taxpayer assistance than they should have.

Others explained the big numbers by pointing to subsidy payments that have been rising with soaring premiums on the economically shaky exchanges or by suggesting that some consumers figured out how to game the system.

“There may be some strategic behavior involved, with some people intentionally underestimating their income with the expectation that they will not have to pay back excess credits beyond the cap,” said Timothy Jost, a law professor at Washington and Lee University. “But estimating income for people with seasonal or hourly pay jobs is very difficult, and expecting people to revise their income estimates every month, with corresponding revisions in their premium payments, is not realistic.”

For that reason, Obamacare defenders warn against being too harsh on customers. They say it doesn’t make sense to repeal the caps and demand full repayment of excessive subsidies.

“There are tips people get that are hard to predict, there’s holiday pay — there are many reasons people might have done their best but gotten an overpayment,” said Cheryl Fish-Parcham, director of access initiatives for Families USA, a consumer group that advocates for affordable health care.

Under Obamacare, the subsidy money goes straight to insurers, though the customers are responsible for returning overpayments. Once they hit the repayment cap, however, the extra money amounts to a taxpayer-funded benefit they don’t deserve.

Republicans say allowing people to keep benefits to which they aren’t entitled adds to their case against Obamacare.

“That’s just yet one more absurdity in the Affordable Care Act. It makes no sense,” said Sen. John Kennedy, Louisiana Republican.

He said education, public safety, infrastructure and defense could use the money instead. “Maybe — God forbid, don’t faint dead away — we could actually give some of it back to the taxpayers,” he said.

The House passed an Obamacare replacement that would have recaptured all of the excess subsidy during a multiyear transition period from the current program to a Republican system. But the Senate discarded the bill, and the repeal push faltered amid Democratic opposition and defections from three Republicans.

A White House official said Wednesday that the inability to claw back excess subsidy is outrageous and should be remedied, though analysts say any attempt to scrap the cap would likely run into a Democratic filibuster in the Senate.

Senate Finance Committee spokeswoman Julia Lawless said Chairman Orrin G. Hatch, Utah Republican, “has consistently supported congressional efforts to claw back Obamacare’s overpayments.”

“While past efforts have been blocked by Senate Democrats, the chairman is continuing to talk to members on how this can be best addressed,” she said.

It’s unclear if the forfeited dollars exceed what Congress should have expected or what future years might hold. A spokeswoman for the Congressional Budget Office, which evaluates the likely fiscal impact of legislation, said it hasn’t studied the issue.

As it stands, subsidized customers must pay back no more than $1,275 — $2,500 for families — although repayments among low and midrange earners are capped at $300 and $750 ($600 and $1,500 for families), respectively.

The law was originally far more generous, capping the amount the government could claw back at $250 for individuals and $400 for families.

But Congress has twice passed bills raising the caps, freeing up more money to spend on other bipartisan initiatives: First in 2010, as part of the annual “doc fix” to stave off cuts to Medicare reimbursements for doctors, and then again in 2011 to pay for repeal of Obamacare’s unpopular 1099 provision, which would have required businesses to fill out a tax form every time they paid a vendor $600 or more.

Mr. Jost said the amount forfeited through Obamacare is still a “drop in the bucket” compared with the hundreds of billions of dollars that fall into the “tax gap” created by individuals and business that underpay taxes overall.

“If Congress is serious about making sure people pay their taxes,” he said, “it would dramatically increase funding for IRS audits for people who are currently cheating on their taxes and getting away with it — and they are not primarily poor people.”