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AHCA failure complicates outlook for health care and tax reform

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Republican leaders abandoned efforts to pass a health care bill last week after changes meant to appease their caucus couldn’t overcome opposition. The failure not only threatens GOP efforts to repeal and replace the Affordable Care Act (ACA), but also complicates tax reform efforts.

The American Health Care Act (AHCA) would have repealed broad swaths of the ACA and was estimated to cut taxes by approximately $1 trillion. House Republican leadership and President Trump scrambled to amend the bill to mollify their members’ opposition before Trump ended negotiations and demanded a vote on March 24. He warned Republicans that he would abandon efforts to repeal the ACA if House Republicans didn’t approve the AHCA, but in the end House Speaker Paul Ryan, R-Wis., canceled the vote after it became clear the bill would fail.

House Republican leaders have not definitively ruled out returning to health care reform at some stage, but Ryan clearly indicated that they plan to move on to the rest of the agenda for now. The failure of AHCA clears the agenda for tax reform to be considered more quickly, but it also makes tax reform more difficult.

The AHCA would have provided $1 trillion in tax cuts that would make revenue-neutral tax reform easier to achieve. Now Republicans must choose between leaving in place unpopular ACA taxes as part of tax reform or finding extra revenue to pay for their repeal. Republicans could also abandon the idea of revenue-neutral tax reform altogether. But if they plan on using the reconciliation process to avoid 60-vote procedural hurdles in the Senate, portions of their bill would likely be required to sunset after 10 years to avoid revenue losses outside the budget window.

Ryan hinted at his press conference that ACA taxes could be left in place for future health care reform efforts, and that tax reform would focus on other areas of the tax code. These kinds of details will be ripe for consideration as the process moves forward.

The AHCA would have repealed or delayed most ACA taxes along staggered timelines, including:

  • 3.8% Medicare tax on net investment income
  • 0.9% Medicare surtax on earned income
  • Limit on the deductibility of salaries paid to health care executives
  • Ban on reimbursements for over-the-counter medication from Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs) and Medical Savings Accounts (MSAs)
  • Increased penalties on impermissible HSA and MSA disbursements
  • Cap on FSAs (cap is $2,600 in 2017)
  • Limit on employer deduction related to Medicare Part D subsidy
  • 10% adjusted gross income floor for deducting medical expenses
  • 10% tanning tax
  • Excise taxes on individuals and employers often called coverage “mandates”
  • Fee on the pharmaceutical industry
  • Medical device excise tax (currently suspended)
  • Fee on the insurance industry (currently suspended)
  • 40% excise tax on high-cost health plans known as the “Cadillac tax” (currently suspended)

All these taxes now stand to remain unchanged until and unless Republicans return to health care reform or address them independently or as part of tax reform. House Republican tax writers are currently working on drafting full tax reform legislation based on the blueprint they released last June. The goal has been to release a full bill by the end of April and pass it in the House by August, but that timeline could now change.

Republicans can use the reconciliation instructions meant for AHCA on tax reform if they want, which would allow passage in the Senate on a simple majority vote. Senate Republicans are currently focused on nominations and other issues and had not drafted their own health care bill and have not begun drafting a tax reform plan.

Contacts

Mel Schwarz

Partner, Washington National Tax Office
T +1 202 521 1564

Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

Dustin Stamper
Director, Washington National Tax Office
T +1 202 861 4144

Jeffrey Martin
Senior Manager, Washington National Tax Office
T +1 202 521 1526

Shamik Trivedi
Manager, Washington National Tax Office
T +1 202 521 1511

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