Health-Care Bills' Tax Cuts Aren't a Done Deal

By Richard Rubin Features Dow Jones Newswires

Don't count on a retroactive tax cut just yet.

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Republican senators aren't sold on a piece of the House-passed health-care bill that makes this past Jan. 1 the effective date for tax cuts on capital gains, health-insurance companies and pharmaceutical companies.

The cuts would be to taxes created by the Affordable Care Act in 2010. Republicans want to get rid of them while they change other aspects of the law. How and when that happens are key unresolved questions as the Senate writes its own legislation, especially as Republicans question Medicaid cuts and other elements of the House plan. To pay for keeping some of Obamacare's expanded coverage, senators may choose to keep some of the taxes that paid for it.

"I don't see how you can repeal all of the pay-fors...and still meet the goal of providing health-insurance coverage for people who truly need assistance," Sen. Susan Collins (R., Maine), a crucial moderate, said this week.

The House bill, which passed on a 217-213 vote May 4, would remove most of the taxes in 2017. For individuals, the biggest change retroactive to January would be the end of a 3.8% tax on net investment income such as capital gains, dividends and interest, dropping the top tax rate on dividends and capital gains to 20%. The 3.8% tax also applies to profits from businesses in which the taxpayer isn't actively involved.

The tax applies only to single taxpayers with incomes above $200,000 and married couples with incomes above $250,000. Even within that group, the 3.8% tax is highly concentrated at the very top of the income distribution. More than 60% of the benefit of repeal would go to the top 0.1% of households, according to the Tax Policy Center, a nonpartisan joint project of the Brookings Institution and the Urban Institute.

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The economic incentive for a tax cut effective in January 2017 will wane as the completion of the health bill looks more like a spring or summer project. Retroactive tax cuts offer little if any incentive for taxpayers, instead providing a windfall for decisions that taxpayers have already made.

Other retroactive provisions in the House-passed bill would loosen a cap on how much executive compensation health insurers can deduct, and remove limits on using flexible spending accounts to purchase over-the-counter medication.

One path for the Senate could be a repeal of the taxes but a delay in the effective dates. Compared with immediate repeal, that approach generates money within the 10-year budget-scoring window without changing the ultimate policy.

Lawmakers could then use that money to soften some of the bill's Medicaid cuts or to expand tax credits to help people purchase health insurance.

"Generally speaking, I'm a little skeptical of retroactive tax provisions, but I might be persuaded," Sen. John Cornyn of Texas, the Senate's second-ranking Republican, said Tuesday. "We're going to save a whole bunch of money, but we're going to have to spend some money too, to make sure people have access. So how that sorts out is part of the puzzle."

Ryan Ellis, a conservative tax activist, says Republicans should include immediate and retroactive tax cuts.

"Senate Republicans should not outsource their fiscal policy priorities to Jimmy Kimmel," he said.

The host of the television show "Jimmy Kimmel Live," whose infant son was born with a heart defect, had argued in an emotional monologue this month that "no parent should ever have to decide if they can afford to save their child's life."

Delaying the repeal of some of the taxes is already a strategy the House used. An earlier version of the bill repealed a 0.9% tax on wages, applicable to individuals making more than $200,000 and married couples making above $250,000, in 2017. But the final version delayed that repeal until January 2023.

Republicans may end up prioritizing some tax cuts over others, said Phil English, a former GOP House member from Pennsylvania who is now a lobbyist at Arent Fox LLP.

The investment-income tax faces strong GOP opposition, he said, and repealing a tax on medical devices has bipartisan support. Others face a less certain path, said Mr. English, whose clients include a pharmaceutical company interested in the details of the annual industry fee.

"I'm supportive of repealing all the Obamacare taxes," Sen. Mike Crapo (R., Idaho) said Tuesday. "Now, that may require some sophisticated ways to achieve it. I'm open to how it gets done and I'm not committed to any specific way."

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

May 10, 2017 16:37 ET (20:37 GMT)