Pass or Fail, GOP Health Bill Will Shape Tax Reform

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.”