Pass or Fail, GOP Health Bill Will Shape Tax Reform

Senate Republicans’ current Obamacare impasse has key implications for their next big legislative priority.

Wall Street wants Congress to repeal an Obamacare tax on most income from stocks and bonds for high earners.
AP Photo/Richard Drew
July 10, 2017, 8 p.m.

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.”

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