Is the ACA Bringing the Family Back Together (for Tax Purposes)? Investigating the Dependent Coverage Mandate Effect on Dependent Tax Exemptions
A 2010 policy change due to the Affordable Care Act allowed dependent children to remain on parental health insurance policies until age 26. Evidence shows the mandate increased insurance coverage among affected young adults and also increased premiums for family health insurance policies. Other work has shown that the dependent coverage mandate has had spillover effects on dental insurance and prescription drug coverage. The notion of broader and perhaps unintended effects due to the ACA motivates further work into how the dependent coverage mandate is affecting individual and family decision making outside the realm of health insurance. In this paper we investigate the use of dependent tax exemptions as a mechanism families could use to pay for increased costs associated with expanded coverage. This paper posits that some families pay for potential increased health insurance costs, in part, by claiming those newly-insured young adults as dependents for tax purposes. The financial advantage of claiming a dependent comes from being able to deduct from taxable income an additional “personal exemption,” which amounted to $3,950 for the 2014 tax year, thus reducing total taxes owed. There is an inherent tension in terms of tax exemptions between parents and adult children earning their own income. If a parent claims a young adult daughter with a dependent exemption when filing taxes, the daughter would not be able to claim a personal exemption when filing her own tax return. We consider the possibility that when parents allow adult children access to their employer health insurance plans via the new dependent coverage mandate rules, the likelihood of the parent, rather than the child, claiming the available tax exemption increases. Using data on households from the Medical Expenditure Panel Survey, we use a difference-in-difference methodology comparing changes in the likelihood of being claimed as a dependent on a tax return for the 19-25 year-olds affected by the coverage mandate compared to a group of 16-18 year-olds that were unaffected. We find a significant increase in dependent tax exemptions among 19-25 year-olds following implementation of the dependent coverage mandate. Family income gains from switching an exemption from a young adult child to the parent would shift a substantial portion of young adult insurance coverage costs (ultimately medical costs) to other taxpayers. We further compare the overall social costs and benefits of the mandate and show that welfare gains are unlikely given meager current gains in health and without accounting for indirect benefits stemming from including the younger and relatively healthier young adults in insurance pools.