Net investment income tax — gone.
Medical device tax — obliterated.
Increase of tax on health savings accounts, tax on over-the-counter medications, tax on employee health insurance premiums and the tanning tax — all history.
Under the Republicans’ health care bill in the U.S. House of Representatives, the taxes implemented to support the Obama administration’s Patient Protection and Affordable Care Act would be repealed. New taxes were a key part of the ACA because they provided the funding needed to expand Medicaid and provide health insurance subsidies to low- and middle-income Americans.
The American Health Care Act, which seeks to repeal and replace the ACA, passed the House on a party-line vote but has not gained much traction in the Senate. In fact, the upper chamber is crafting its own repeal-and-replace legislation that could differ widely from the House proposal.
Calling it the “big unknown,” David Brunori, partner in the Quarles & Brady LLP Washington, D.C., office, said no one really knows what the Senate is going to do with health care reform. Public backlash over the potential elimination of protections for pre-existing conditions could influence senators to include provisions in their bill that their colleagues in the House would find difficult to support.
However, Brunori noted Republicans typically like tax cuts, largely believing the wealthy, in particular, will be likelier to invest and create jobs if they pay less of their earnings to the government. And, the slew of new taxes that came with the ACA was a driving force behind the unhappiness with health care reform.
“The tax part is almost certain to remain more or less the same,” he said of the new legislation.
Higher wage earners — married couples making more than $250,000 annually — stand to benefit the most from the GOP’s health care plan. For example, the 0.9 percentage-point increase in the Medicare payroll tax that hiked higher earners’ rate to 3.8 percent, and the additional tax on their investments, would be erased. They also could contribute more to their health savings accounts.
In addition, this group will likely get more benefit from the comprehensive tax reform the Republicans plan to undertake later this year. No legislation overhauling the tax code has been revealed, but some proposals call for reducing deductions and imposing new taxes on imported goods. The net effect of the proposals would result in an overall tax decrease which, under Congress’s PayGo Rule, would require corresponding cuts in spending.
The repeal bill would decrease the federal deficit by $119 billion. Congress could then point to the deficit savings in its health care bill and not have to cut spending as deeply in the tax reform bill.
What could and should happen is still very much uncertain. Kevin Halloran, partner in the tax group at Bose McKinney & Evans LLP, said individuals and businesses are in uncharted territory as far as any coming tax changes brought by a health care bill or new tax code.
“As a tax adviser, what I almost always tell my clients, you have to deal with the law as it is on the books,” Halloran said. “… Frankly, we don’t know where this is going and we don’t know if health care reform is even going to come.”
Tax code and social policy
For low- to moderate-income individuals, the Republican plan injects a heavy dose of personal responsibility. David Jose, a partner in the health care practice group at the Indianapolis office of SmithAmundsen LLC, characterized the GOP bill as an example of the tax code being used to realize social policy objectives.
The Affordable Care Act used the new taxes to help the marginalized get health insurance. An estimated 20 million Americans obtained coverage through either the expanded eligibility for Medicaid or the subsidy that was provided to those earning up to 400 percent of the federal poverty level so they could buy a policy on the health care exchange.
House Republicans have taken a completely different approach by rolling back Medicaid and offering tax credits in place of federal subsidies. The refundable tax credits would be available to individuals who do not have employer-provided health insurance and would be based on age, not income. Those younger than 30 could receive up to $2,000 while those over 60 would be eligible for as much as $4,000.
Jose said the American Health Care Act is a “fascinating piece of legislation.” The large-scale tax cut is intimately connected not to a new program or initiative but rather to a major policy change where people are more on their own.
Looming over the tax credit proposal is the question of whether the money will be enough to cover medical expenses. Especially for middle-aged and older people, the credit might offer little relief since they tend to have high medical costs and their premiums could increase because insurers will no longer have to conform to ACA requirements to keep rates low for older people.
Compounding the problem is that millions could lose insurance under the AHCA. The Congressional Budget Office estimates the Republican plan would leave 23 million more people without coverage by 2026. Health care providers could see an increase in the number of charity cases and, to cover those uncompensated costs, prices could rise for everybody.
Time for a tune-up
Repealing taxes that have been implemented for specific programs, like the AHCA would do, is not unprecedented. The Superfund tax imposed on industries in the late 1980s to help pay for the cleanup of contaminated sites was allowed to sunset in 1995.
Still, tinkering with a program already in place, like the Affordable Care Act, is hard and, as Brunori noted, nothing is more difficult, historically, than overhauling the tax code because changes create winners and losers.
The last time Washington tuned up the nation’s taxes was in 1986. Over time, provisions have been added to the code, which has done things such as adding more personal income tax rates, and the economy has become more sophisticated with advances in finance, banking and investing.
Halloran sees a need for Congress to revamp and reconfigure.
“In terms of overall complexity and complexity of administering both within the government and outside the government, in terms of tax practitioners and taxpayers themselves, I think we’re ripe for tax reform overall,” he said. “Whether it gets done, we don’t know.”•