Labor Market Effects of the Affordable Care Act: Evidence from a Tax Notch

States that declined to raise their Medicaid income eligibility cutoffs to 138 percent of the federal poverty level (FPL) under the Affordable Care Act (ACA) created a "coverage gap'' between their existing, often much lower Medicaid eligibility cutoffs and the FPL, the lowest level of income at which the ACA provides refundable, advanceable "premium tax credits'' to subsidize the purchase of private insurance. Lacking access to any form of subsidized health insurance, residents of those states with income in that range face a strong incentive, in the form of a large, discrete increase in post-tax income (i.e. an upward notch) at the FPL, to increase their earnings and obtain the premium tax credit. We investigate the extent to which they respond to that incentive. Using the universe of tax returns, we document excess mass, or bunching, in the income distribution surrounding this notch. Consistent with Saez (2010), we find that bunching occurs only among filers with self-employment income. Specifically, filers without children and married filers with three or fewer children exhibit significant bunching. Analysis of tax data linked to labor supply measures from the American Community Survey, however, suggests that this bunching likely reflects a change in reported income rather than a change in true labor supply. We find no evidence that wage and salary workers adjust their labor supply in response to increased availability of directly purchased health insurance.