No matter how the Senate effort to repeal Obamacare shakes out, the result will have important ripple effects on what is for many Republicans an even bigger legislative priority—tax reform.
An intraparty revolt forced Senate Majority Leader Mitch McConnell to delay a vote repealing the Obama administration’s signature health care law in late June. Lawmakers are now back from the Fourth of July recess, and McConnell’s campaign to win over moderate Republicans has resumed.
If GOP leaders force a difficult vote to pass an Obamacare-repeal bill, or if they keep some of the law’s taxes intact, that could pose budgetary and political challenges for the broad rewrite of the tax code that Republican tax writers hope to accomplish, experts say.
“It makes it much harder for them to pass revenue-neutral tax reform,” said Howard Gleckman, a senior fellow at the Tax Policy Center.
If Congress doesn’t pass an Obamacare-repeal bill, tax writers will be faced with a $700 billion decision: whether to eliminate the health care law’s taxes in their own reform package.
One of the top targets is Obamacare’s 3.8 percent tax on net investment income—such as income from most stocks and bonds—for high earners. The investment tax is added on top of the 20 percent tax rate on capital gains that top earners pay.
House Ways and Means Committee Chairman Kevin Brady hopes to reduce the top capital-gains rate to 16.5 percent, and scrapping the 3.8 percent tax as part of the Obamacare-repeal bill helps him to that end, Gleckman said.
“So in effect what you have done is you’ve gotten halfway there if you can repeal the net investment tax in the health bill, so it makes it much less expensive to cut capital-gains rates to 16.5 since you’ve already kind of come halfway,” Gleckman said.
Repealing the investment tax would cost $172 billion over 10 years.
But before leaving for recess, some Senate Republicans were open to the idea of keeping the investment tax as a way to pay for more health care subsidies for lower-income Americans. That, they believe, may help bring over moderate Republicans like Sens. Susan Collins of Maine or Dean Heller of Nevada to vote for the bill.
Influential business and conservative groups want the tax gone, however. Club for Growth President David McIntosh said the proposal to keep the investment tax was a “step in the wrong direction,” and The Wall Street Journal’s conservative-leaning editorial board called the proposal “political fantasia.”
The Senate repeal bill would also eliminate Obamacare taxes on medical devices and a Medicare payroll tax for high-income individuals, and delay a tax on high-dollar health plans, the so-called Cadillac tax. Employers and labor unions oppose the Cadillac tax, and some Democrats have criticized the provision. Brady may face pressure to eliminate those taxes as well if the repeal bill fails.
So far, Brady has rejected addressing Obamacare taxes in his tax-reform plan. In a June 30 interview on C-SPAN, he brushed off the idea of revisiting the investment tax in a reform bill, as House Freedom Caucus Chairman Mark Meadows and others have suggested.
“If Congress isn’t willing to eliminate that tax now, why would they do it later?” Brady said.
Tax writers could choose to avoid addressing Obamacare taxes in any tax-reform bill, but they may not be able to avoid the political fallout from the repeal legislation, whether it passes or not.
Rohit Kumar, a principal at PricewaterhouseCoopers and former aide to McConnell, said the consequences of the health bill failing could be mixed for tax reform. On one hand, he said, it will be demoralizing to Republicans.
“On the other hand, if health care doesn’t succeed, it makes the political necessity of getting tax reform done that much greater because otherwise they’ve got nothing to take back to the voters in 2018 that will motivate the base to turn out,” Kumar said.
The Senate’s Obamacare-repeal bill is historically unpopular. Just 17 percent of Americans approve of the bill, with 55 percent disapproving, according to an NPR/PBS NewsHour/Marist poll released June 28. That could make the repeal vote tough for many lawmakers.
At the same time, tax reform could also be a tough vote for Republicans with competitive general or primary elections.
For an average backbench Republican, cutting taxes is an easy vote. But tax reform is a different story, because revenue-neutral tax reform not only cuts taxes but also eliminates popular deductions and exemptions, Gleckman said. Indeed, the current House tax-reform blueprint features a new tax on imports and eliminates a deduction on interest expenses. Both provisions have proven unpopular with some Republicans and business groups.
“Now imagine that before you make that vote you have to vote to pass a health bill that is exceedingly unpopular,” Gleckman said.
If the political bandwidth for comprehensive tax reform becomes too narrow, lawmakers may consider a series of temporary rate cuts instead. The cuts would need to expire in 10 years for Republicans to use budget reconciliation, which would allow them to pass the measure in the Senate without Democratic votes. Right now, lawmakers wouldn’t concede that permanent tax reform is off the table, but if that were to become the reality, a simple tax cut would begin to look like a better option than nothing, Kumar said.
“I think it would include a straight tax cut that gets the rates to probably less than 25 on the corporate side, and I think it includes individuals as well,” Kumar said. “I think it’s a tax cut across the board for individuals, for pass-through businesses, for small businesses, for corporations.”