February 06, 2014
Senate GOP Obamacare Replacement Is A Net Tax Cut
Last week, three GOP senators–Tom Coburn of Oklahoma, Richard Burr of North Carolina, and Orrin Hatch of Utah–unveiled the latest “repeal and replace” Obamacare plan. One of the key questions people are asking is whether this plan (dubbed the “Patient Care Act“) is a net tax cut, a net tax hike, or revenue-neutral.
Welcome to the Party
The first thing to say is that this is the third major Obamacare replacement plan which has been introduced. The House conservative “Republican Study Committee” introduced H.R. 3121, “The American Health Care Reform Act” last year with Congressman Phil Roe (R-Tenn.) taking the lead. Before that, Congressman and doctor Tom Price (R-Ga.) introduced H.R. 2300, the “ Empowering Patients First Act” (Senator John McCain has since introduced the Senate version, S. 1851).
Each of these bills is different in many ways. Some anticipate using exchanges, and some do not. Some like tax credits, and some like tax deductions. Conservatives looking for an Obamacare alternative might like one bill or the other, or might want to build their own Frankenstein monster out of pieces from all three plans. But they all have the most important part in common: Title I of each bill is a repeal of the Affordable Care Act, Obamacare.
Three Families of Tax Cuts
From a tax perspective, repealing Obamacare gets each bill off to a good start. According to the best/latest numbers we have from the Congressional Budget Office (CBO), repealing the 20 new or higher taxes in Obamacare results in a net tax cut of $1 trillion over a decade (it’s likely quite a bit larger than that since the score is a couple of years old). The individual and employer mandate penalties, the saver and investor surtax, the Medicare payroll tax hike, the “medicine cabinet tax,” etc. all add up. Each bill deserves credit for this very large gross tax cut.
The Patient Care Act has two other tax relief provisions on top of Obamacare repeal. The first is some common-sense enhancements to health savings accounts (HSAs). The most important reform here is allowing HSA-qualified health insurance premiums to be paid for directly out of an HSA, giving a tax benefit to any American purchasing HSA-qualified coverage. This is perhaps a tax cut over a decade of an additional $10 to $15 billion.
The bill’s other tax relief provision is a hybrid of spending and taxes. A new tax credit is created which phases out at three times the federal poverty level (about $36,000 for a single person and $71,000 for a family of four). Essentially, this tax credit provides a bridge between exiting Medicaid and being able to more comfortably afford health insurance. The credit is advanceable (meaning it lowers insurance premiums in real time) and refundable (meaning the recipient gets the credit irrespective of income tax liability). Because credit recipients in this income band are unlikely to have much of an income tax liability at all, this tax credit should score out as mostly spending, with some tax relief effects. It’s still safe to say, however, that the tax cut effects of this credit should come out to somewhere between $25 to $50 billion over a decade.
So there’s three families of tax cuts in the Patient Care Act: Obamacare repeal, HSA expansion, and the creation of a credit. Altogether, that amounts to (roughly) $1.1 trillion to $1.2 trillion in tax relief over the ten-year scoring window.
Capping Employer-Provided Health Insurance’s Exclusion from Taxation
Offsetting this is one and only one gross tax increase. Under the Patient Care Act, the amount of employer-provided health insurance that employees could exclude from their taxable income would be capped. This cap would be set at 65 percent of the average market price for an expensive, high-option plan. To the extent an employee receives health coverage at work above this cap, the employee would have to pay taxes on the compensation like they do on wages.
Because the plan is currently only in detailed outline form, this portion of it is less clear (e.g., 65 percent of what?). But we can take a cue from one of the tax increases contained in Obamacare itself. Starting in 2018, Obamacare is supposed to impose a 40 percent excise tax on “Cadillac plans” (defined as those costing more than about $10,000 for singles or about $28,000 for families). This is expected to raise about $400 billion to $500 billion in tax revenue over the first ten years of its existence.
Just to be pessimistic and to give the Patient Care Act the strictest of scrutiny, let’s double that revenue estimate for their plan. Under a worst case but still reasonable scenario, let’s say that their employer coverage cap raises $800 billion to $1 trillion in taxes.
A Net Tax Cut
What results, of course, is a net tax cut. The Patient Care Act raises taxes by (at most) $1 trillion over a decade, and cuts taxes by (at least) $1.1 trillion over a decade.
Therefore, the Patient Care Act is not only not a tax increase–it’s a tax cut. How large a tax cut is still to be determined by full legislative language, but it’s in that territory.
Plan authors have also said publicly and privately that if they get a surprise score from the Congressional Budget Office, they will re-jigger the plan accordingly to make certain it’s not a net tax increase. I very much doubt they will have to do that.
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