One of the key parts of Governor Daugaard’s budget address was the recommendation to expand Medicaid in South Dakota. I mostly oppose this move because it will increase the federal debt and reduce the purchasing power of all Americans. There are other reasons to oppose Medicaid expansion however. The CBO has just released a report showing the negative impacts of ACA (Obamacare) on the labor market. This report offers further reason for not expanding Medicaid in South Dakota.
ACA overall impact on the labor market
Before looking at the impact of Medicaid expansion is might be worth taking a moment to see how CBO estimates ACA as a whole will impact the labor market over the next decade. Specifically the exchange subsidies will negatively impact the job market. The report estimates that over the next decade about 2 million jobs will be lost due to ACA. Most of that loss due to health insurance expansions.
This from the report:
Both kinds of subsidy increase the resources of recipients, reducing work incentives through the income effect. In addition, the subsidies decline as income increases, reducing the return on earning additional income. That decline is effectively an increase in recipients’ effective marginal tax rate, so it generally reduces their work incentives through the substitution effect. CBO also expects that the subsidies, by reducing the burden of unemployment, will create additional work disincentives for people who are unemployed for part of the year
Basically the subsidies create even more regressive income tax brackets, making it very hard for people to do better for themselves financially. I know many proponents of the current income tax brackets say it is progressive and that it helps the poor. Yet after working in a tax office for a number of years now I can say that a progressive income tax system (especially accounting for EITC) does disincentivize many taxpayers. People will suddenly have a good year where they can pay their bills and have a little left over, only to find out they went up a tax bracket and may have actually gone backwards. ACA is going to amplify that problem with the current regressive income tax brackets.
The number of people who have a disincentive from working due to Medicaid expansion is lower than those with a disincentive due to subsidies, but it still a large amount. CBO estimates that expanding Medicaid will decrease the labor supply earnings over the next decade by 0.05% overall (compared to the labor supply earnings decrease of 0.43% due to subsidies). Most of this reduction in labor force will come from the newly eligible Medicaid enrollees. Since this is lower-income labor being talked about, that 0.05% of labor supply earnings translates to a reduction in the labor force by about 4%; which in turn means a 0.03% decrease in the labor supply (measured by compensation) due to newly eligible Medicaid enrolees.
Medicaid expansion provides the same disincentive to work that the progressive tax brackets create. That is why of the labor supply lost due to Medicaid expansion will occur for people who are newly qualified because of the law change. Medicaid expansion may on paper sound like a way to help poor people. But it almost appears that Medicaid expansion is nothing but a way to keep people from trying to do better for themselves financially. Hopefully Governor Daugaard and the SD legislature will take this into account when discussing Medicaid expansion during the 2016 session.
All ACA effects on supply of labor
Before I end this post it is worth looking at one chart. This shows the various portions of ACA that the CBO estimates will negatively impact labor supply (as a percentage change in earnings). Notice that overall ACA will possibly cost almost 1% of labor participation earnings.