Why a delay in Affordable Care Act repeal means a delay in tax reform
A delay would not only affect health care in the US, it could have significant implications for a big 2017 tax bill.
—It looks increasingly as if Congress may slow-walk its efforts to repeal the Affordable Care Act. Despite their party’s promises to eliminate the law on “Day One,” several key GOP senators want Congress to delay repeal until it can figure out how to replace the current health insurance system—a process likely to take at least several months.
This delay would not only affect health care in the US, it could have significant implications for a big 2017 tax bill. Here are four ways that ACA delay could change the way Congress addresses the revenue code:
Funding ACA subsidies. Most Republicans say they loathe the ACA taxes, including the 3.8 percent tax on net investment income and the additional 0.9 percent Medicare payroll tax on high income people, the tax penalties for those without insurance, and various new taxes on health care providers. However, those taxes serve three important purposes: They strengthen Medicare’s finances, help pay insurance premiums for many middle-income households, and encourage people to get coverage.
It now seems those taxes are not going anywhere, at least for a while. The longer Congress waits to repeal the ACA, the longer those taxes will remain in place since they are essential to maintaining affordable coverage for millions of people in the current system. Without the subsidies, they wouldn’t buy, leaving more of the marketplace to the sickest—a scenario certain to drive up premiums even further and wreck the private market. But the longer the taxes remain on the books, the more likely they are to get tangled up in a broader tax bill.
The baseline: The ACA taxes create yet another problem for GOP leaders. They had hoped to repeal the levies, which under current law will raise about $1 trillion over the next decade, before tackling a tax bill. Why? Because they have promised that any 2017 tax bill will not increase the deficit and a $1 trillion ACA tax cut would lower Congress’s official revenue baseline, making it easier for lawmakers to pass a tax cut that they can claim meets that target of revenue-neutrality. However, if the ACA taxes are not repealed first, the higher revenue baseline makes a big tax cut much tougher.
Paying for Subsidies: While Republicans have yet to agree on how to do it, most believe that any ACA replacement must include new subsidies to make insurance premiums affordable. Many lawmakers would expand Health Savings Accounts and create refundable tax credits.
That might be doable before they pass a big tax bill. But a key element of the House’s tax reform blueprint is to pay for lower rates by slashing existing subsidies. Turning around within months and enacting new targeted tax breaks may be a heavy lift, and would not be easy to explain. One solution could be fund new individual credits by reducing or eliminating the current exclusion for employer-sponsored health insurance. But that would be highly controversial.
Capacity: The GOP hoped to repeal the ACA early this year and take a year or more to agree on a replacement. That would have allowed the Ways & Means and Finance committees the time to first turn their attention to a big tax bill. Now, the panels will have to play a major role in designing any ACA replacement, an enormously complex undertaking that will take at least months and perhaps longer. That will constrain their ability to focus on a tax bill, itself an extremely difficult and time-consuming effort.
Replacing the ACA will be hard, and it will have inevitable consequences for the rest of the Trump agenda including—or perhaps especially—for a 2017 tax bill.
This story originally appeared on TaxVox.
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