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Study: Medicaid expansion boosts kids' incomes and government tax revenue

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Expanding Medicaid may be a better investment than many states realize.

Kids eligible for the public program earn more as adults, a new analysis of Internal Revenue Service data, published as a National Bureau of Economics Research working paper, shows. They pay more taxes on those earnings and, over the course of their lifetime, researchers estimate that they'll ultimately repay 56 percent of the Medicaid dollars spent on them.

Yale health economist Amanda Kowalski, working with researchers at the Treasury's Office of Tax Analysis, was able to look at tax filing data from parents in the early 1980s, right when states were starting to expand health coverage to low-income kids through the new Children's Health Insurance Program (CHIP).

The researchers knew, based on income, which families had CHIP-eligible kids. And that allowed them to look at the tax filings from a generation later, to see whether each year of eligibility for the program had any effect on their earnings.

Turned out, it did: each additional year of Medicaid eligibility increased cumulative tax payments by $247 at age 28. To put that in perspective, the average 28-year-old woman has paid $18,114 in taxes — so the increase is small, but statistically significant. For men, the increase is smaller ($127) and on a larger tax base ($23,025, mostly because men tend to earn more than women).

More time eligible for Medicaid also reduced use of the Earned Income Tax Credit, a refundable tax credit for low- and middle-income, working tax-filers. Women used $109 less, while men received $41 less in EITC credits. This finding could push back against some of the arguments that programs like Medicaid create a culture of dependency, encouraging recipients to continue to rely on public programs. This, rather, suggests the opposite: that early access to Medicaid makes kids less likely to need government help later in life.

Last, the researchers also tried to game out what the increased tax payments mean over the course of a lifetime — how much the money given back to the government offsets the extra spending on Medicaid. These are projections into the future, and they assume that the higher earnings (and higher tax payments) remain steady through age 60. If that is true, they calculate that Medicaid-eligible kids pay back 56 cents for every extra dollar of Medicaid spending.

"Our research suggests that Medicaid generally has favorable effects on eligible children," Kowalski and her co-authors write. "We find that by expanding Medicaid to children, the government recoups much of its investment over time in the form of higher future tax payments."