Some Health Reform-Related Taxes May Remain Even if Law Overturned

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By Brett Ferguson and Heather M. Rothman  

Even if the U.S. Supreme Court were to strike down the entire health care law, a number of controversial tax provisions prompted by it could still remain, analysts told BNA June 25.

A key focus of the court is on the constitutionality of the Patient Protection and Affordable Care Act's mandate requiring individuals to buy insurance or pay a tax penalty.

However, Congress also passed the Health Care and Education Reconciliation Act of 2010, which was signed into law a week after PPACA and allowed Senate Democrats to add new, more controversial tax provisions to help pay for the health care overhaul without having to achieve the crucial 60-vote threshold that was needed to pass the initial bill.

The reconciliation bill was rarely mentioned in the arguments and there was not much distinction in the arguments between the two bills.
--Garrett Fenton, Miller & Chevalier

The reconciliation bill included several provisions that were unique from PPACA, such as the new 2.3 percent excise tax on medical devices and a 3.8 percent tax on investment income for high-income households.

The economic substance doctrine was also codified under the reconciliation bill, as was a $23 billion provision to prohibit companies from using the cellulosic biofuel producer credit for paper pulp waste product known as “black liquor.”

Because all of those provisions were passed separately from the Patient Protection and Affordable Care Act and were never part of that bill, and only one of the provisions has anything to do with health care, analysts said it raises questions about whether the provisions should be impacted if the Supreme Court were to strike down the health care law.

It is even an open question as to what would come of the tax provisions that are in both PPACA and the reconciliation bill, such as the 40 percent excise tax on so-called Cadillac health plans, tighter rules for tax code Section 501(c)(3) organizations, as well as the 10 percent tax on tanning salons, since some people may take the view that those provisions deserve to remain because they were also passed separately from PPACA.

A Supreme Court decision is expected June 28.

Reconciliation, PPACA Inextricably Linked?

Thomas Miller, a fellow at the American Enterprise Institute, said he expects that any provisions that were in both the reconciliation bill and the PPACA will be linked together by the Supreme Court.

If the Supreme Court invalidated the entire Patient Protection and Affordable Care Act, “the things referencing a change to it in reconciliation would be eliminated too because there wouldn't be anything in the law for [the reconciliation bill] to modify,” Miller told BNA.

The reconciliation bill, for instance, amended PPACA to raise the threshold for the value of health plans subject to the tax on “Cadillac” health plans to $10,200 for individuals, up from $8,500 under PPACA. But if the section of the tax code creating that new tax were to be eliminated by the Supreme Court's action, then there would be nothing left for the reconciliation bill to amend, Miller said.

Fate of Device Tax.

Yet analysts were more uncertain about how the court would deal with provisions such as the medical device tax, which only appeared in the reconciliation bill.

“It depends how they interpret the reconciliation bill,” Garrett Fenton, an attorney at Miller & Chevalier, said of the impending Supreme Court decision. If there is a view that the revenue-raising tax provisions of the reconciliation bill are an integral part of the health reform law, then they could all be stripped out if PPACA is struck down, he said.

However, there are also several education provisions in the reconciliation bill, so it is not a guarantee that the reconciliation bill would be struck down in its entirety even if PPACA were.

“The reconciliation bill was rarely mentioned in the arguments and there was not much distinction in the arguments between the two bills, so given that [the taxes in the reconciliation bill] weren't addressed, it's hard to say what will happen,” Fenton told BNA.

Christopher Condeluci, a tax attorney with Venable LLP and former Republican tax counsel to the Senate Finance Committee, said some could argue that all of the taxes in the reconciliation bill should be nullified because they were put in place to pay for the health care subsidies.

Hard to Distinguish Between Provisions.

The subsidies were somewhat related to the mandate, but they also were created to pay for a Medicaid expansion, and “you almost can't distinguish between where the Medicare savings is going to be directed to and where the tax savings is going to be directed to,” Condeluci said. “It's all government spending. Those are costs that need to be covered and the tax provisions were enacted to cover that government spending.”

Generally, there a sense from analysts that the Supreme Court will have to provide some very clear language in its ruling about what should happen with the “spillover” items of the health care overhaul, including the extension of the refundable adoption tax credit through 2011.

“It doesn't seem like that one should be caught up in this,” Fenton said.

Also the court, in the past, has not wanted to make its decisions retroactive in a way that causes massive refunds to be paid, so there is an expectation that certain taxes or credits that may have already been paid will not be reversed, analysts said.

But no one but the Supreme Court knows at this point just how those issued will be addressed, the analysts stressed.

“They're going to want to figure out how to clear up some of this baggage,” Miller said.

By Brett Ferguson and Heather M. Rothman