States May Eye Health Care Flop as Harbinger on Tax Reform

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By Che Odom

States might look to the House stumble on the American Health Care Act as an indicator of just how much Congress can change the tax code this year.

House Speaker Paul D. Ryan (R-Wis.) told reporters during a March 24 press conference that, with President Donald Trump’s agreement, leadership pulled the proposed American Health Care Act.

States may interpret the setback to repealing the Affordable Care Act as forecasting trouble for Republicans on tax reform—threatening complications for state budget planners worried about sweeping changes, including elimination of the deduction for state taxes.

“The most important tax bill so far this Congress is the American Health Care Act,” Max Behlke, director of budget and tax policy at the National Conference of State Legislatures, said March 24 at a Tax Foundation event in Washington.

“If that dies this afternoon on the House floor, it is going to be turmoil for any big issue at all, much less reforming the overall tax code,” he said hours before Ryan’s announcement.

However, Ryan didn’t consider the failure to garner consensus on the AHCA as hinting at future failure.

“I don’t think this is prologue for other future things, because members realize there are other parts of our agenda that people have even more agreement on on what to achieve,” he said. “We have even more agreement on the need and the nature of tax reform, on funding the government, on rebuilding the military, on securing the border.”

Moving To Taxes

Trump told Congress that, whether the health care bill fails or succeeds, lawmakers must move next to taxes, according to White House press secretary Sean Spicer. Lowering the overall corporate tax rate, broadening the base of what’s taxable and eliminating some deductions are on the agenda for the president and Ryan.

During the press conference, Ryan said that the AHCA setback makes tax reform more difficult—but not impossible.

“We will proceed with tax reform, we will continue with tax reform,” he said, adding that the “Obamacare taxes stay with Obamacare. We’re going to go fix the rest of the tax code.”

AHCA-Tax Reform Connection

Work on the health care bill was touted as being a necessary precursor to tax reform. For one, it could free up $337 billion in savings to pay for tax break, Dana Peterson, an economist at Citigroup Inc., wrote in a client memo.

Future efforts to repeal the ACA remain in question. During the press conference, Ryan only said that lawmakers are now going to “figure out what the next steps are.”

While Behlke and others may view failure on the American Health Care Act as damaging to the GOP agenda, some are less convinced. Peterson said failure on the part of Republicans to deliver on either health care or taxes “would not signal the death knell” for the other.

The vote on health care needed to happen soon, however, so Congress could move on to taxes this session, Peterson said.

Predicting exactly what Congress will do on taxes may be impossible, but it would be helpful for state legislatures, some of which have already ended their 2017 sessions. Depending on what ultimately comes out of Washington, some states may hold special sessions to make adjustments to their tax laws.

Tactics for States

States may try to enact conditional legislation, according to Nicole Kaeding, an economist Tax Foundation’s Center for State Tax Policy. For example, a certain law will only take effect “if” the federal government enacts certain changes, she said at the Tax Foundation event.

Going forward, states may look at ways of packaging issues, such as bills regarding state taxation of online, remote retailers and of out-of-state residents for work they do within their borders, and pushing Congress on them in a unified way, Kaeding said.

“Think of it holistically,” she said. “Is there a way to weave all these issue together?”

Whatever happens on taxes at the federal level, a debate on how Congress might or should broaden the base of what’s taxable is likely to occur, and that will be positive, Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy, said at the Tax Foundation event.

“It’ll be a good thing no matter what the outcome is,” he said.

However, if any level of the House tax blueprint is enacted—a plan promoted by Ryan—states can expect major changes that will require attention, Gardner said.

“Change, positive or negative, is a threat,” Gardner said, adding that he wished members of Congress gave thought to the impact on states when deciding tax policy.

With assistance from Jennifer McLoughlin in Washington

To contact the reporter on this story: Che Odom at COdom@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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