Senate Health Bill Complicates Republicans’ Tax Reform Dreams

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By Colleen Murphy

Senate Republicans may make things harder for their House colleagues by keeping the net investment income tax intact in their health care overhaul bill.

The 3.8 percent tax is estimated to bring in a hefty $172 billion over a decade. By retaining it in the health bill released July 13—not repealing it as the House did in its own bill—the Senate would give the House less wiggle room to make desired rate cuts in tax reform without adding to the deficit.

“Well, that would be true,” Sen. John Thune (R-S.D.), the third-ranking Senate Republican, acknowledged to reporters. Thune said his preference is to get rid of all the Affordable Care Act’s taxes since Republicans have promised to dismantle the law for the last seven years.

“But we have a lot of members that have a different view about that. There’s no question it’s going to have an impact on the decisions we have to make in the future,” Thune said.

The Senate bill, the Better Care Reconciliation Act, is an updated version of a draft released June 22. Majority Leader Mitch McConnell (R-Ky.) delayed a vote on the June draft after several senators said they would oppose a motion to move it forward. Senate Republicans say they hope to vote on the new version as early as the week of July 17 and are awaiting updated cost and coverage figures from the Congressional Budget Office.

It isn’t yet clear if Senate Republicans, who can only lose two votes and still pass the measure, have the support they need.

The bill also doesn’t repeal a 0.9 percent Medicare surtax that applies to wages, railroad retirement compensation, and self-employment income above a certain threshold. The surtax and the net investment income tax, which the June draft would have repealed, apply to high earners—individuals earning more than $200,000 and couples filing jointly and earning more than $250,000. Combined, they would generate $230 billion in revenue over a decade.

Rep. Mark Meadows (R-N.C.), chairman of the hard-right House Freedom Caucus, said that while the impact on the baseline for tax reform when the taxes stay put is “not a rounding error,” it also isn’t an “insurmountable challenge” for Republicans.

“It makes it harder in that it changes the baseline. You’re having to make up a bigger deficit between whatever the baseline is and whatever the tax cuts will be. It certainly makes it more challenging. The lower that baseline, with repealing more taxes, the better off we would be,” he told Bloomberg BNA July 13.

Kicking the Can

Some Republicans, including Senate Finance Committee Chairman Orrin G. Hatch (R-Utah), have said they are open to repealing ACA taxes in tax reform legislation if provisions aren’t axed in a health care bill.

“You can go after these taxes, but go after them when you do tax reconciliation. Trying to do both simultaneously really complicates things. If you try to get the two conflated, neither is accomplished,” Sen. Bill Cassidy (R-La.), a member of the Finance Committee, told reporters July 13. “So in one sense, trying to get that tax addressed in comprehensive tax reform, I think, actually makes tax reform easier.”

House Ways and Means Committee Chairman Kevin Brady (R-Texas) has repeatedly shot down the idea of repealing ACA taxes in tax reform and has consistently called for revenue-neutral reform so the changes can be permanent.

“I continue to believe that each of those Obamacare taxes does the economy wrong,” Brady told reporters July 13.

The House-passed bill ( H.R. 1628) would repeal all the ACA’s taxes, including the net investment income tax and the Medicare surtax. But because those taxes only apply to high earners, Democrats have criticized repealing them as a tax cut for the wealthy—meaning Republican senators may gain political capital by leaving them in place. The Senate bill repeals other ACA taxes, such as the medical device tax.

The changed Senate bill is less regressive than the previous version, the Tax Policy Center said in a July 13 post. The “latest plan would cut average taxes by about $300 in 2026, compared to $670 in the initial version,” the post said.

Also Included

The bill would keep the ACA’s $500,000 limit on how much of health insurance executives’ pay is tax deductible. The earlier version of the Senate bill didn’t include the limitation.

Individuals could also use money in tax-favorable health savings accounts to pay premiums, according to the bill.

Sens. Lindsey Graham (R-S.C.) and Cassidy plan to introduce an amendment to the bill that would only repeal the health law’s medical device tax. The added money would be pooled into a $110 billion per year state block grant program that would replace the ACA’s tax credits.

The medical device tax would bring in $19.6 billion over 10 years, according to CBO.

With assistance from Laura Davison and Alex Ruoff.

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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