Is the ACA bringing the family back together (for tax purposes)? Investigating the dependent coverage mandate effect on dependent tax exemptions

A 2010 national 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. 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. 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 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. Though we point to family health insurance cost as a likely driver of the increased dependent tax exemptions, we cannot rule out a role for other outcomes also affected by the mandate, including labor market changes among 19–25 year olds. We further compare the overall social costs and benefits of the mandate and show that absent significant health improvement to date, welfare gains likely depend on the positive contribution of young adults to insurance pools in terms of lower average costs.