Some Senators in Health Talks Would Keep Tax on Investment Income -- Update

By Richard Rubin and Siobhan Hughes Features Dow Jones Newswires

Republican senators are considering keeping the Affordable Care Act's 3.8% tax on investment income, a reversal that runs counter to the party's long-stated opposition to such taxes.

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Leaving the tax in place would give Republicans two potential benefits as they try to put together a health-care bill that can attract 50 of their 52 members. First, it provides up to $172 billion Republicans can use to make health insurance more affordable to low-income households. Second, it could blunt attacks from Democrats that their bill undermines health care for the many in exchange for tax cuts for a few.

But keeping the investment tax could also make an expected tax overhaul this fall more complicated, and it could erode support from conservatives who see the health care bill as a chance to undo taxes created by the Affordable Care Act.

Several GOP senators said Thursday that retaining the tax was under discussion, but that no decision had been reached.

Republican Sens. Bob Corker of Tennessee and Marco Rubio of Florida said they were open to keeping the tax. Others, including Pat Toomey of Pennsylvania and Ted Cruz of Texas, said they wanted it eliminated.

"We're repealing Obamacare, so the assumption would be that we would get rid of the taxes, too," said Sen. John Thune (R., S.D.), the third-ranking Senate Republican. "But if it takes something like that to get our members on board to move this process forward, I think we have to consider that."

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Under the latest House and Senate bills, the investment tax would be repealed retroactively for income received in 2017. The tax applies to capital gains, dividends, interest and certain passive business income for individuals with income over $200,000 and married couples with income over $250,000.

Repealing the tax would reduce federal revenue by $172 billion over a decade, according to the congressional Joint Committee on Taxation.

The 2010 law paid for expansions in health-insurance coverage with taxes on health industries and high-income households. The House bill and the pending Senate legislation would repeal taxes and lower projected spending in ways that would cause more than 20 million fewer people to have health insurance after a decade, according to the Congressional Budget Office.

The ACA's health-industry taxes -- including a 2.3% excise tax on medical devices -- tend to attract bipartisan opposition. But the parties are divided when it comes to the investment-income tax, and a separate 0.9% payroll tax on high-income households. The payroll tax repeal would be delayed until 2023 under both the House and Senate bills. Now senators may delay or scrap the repeal of the investment-income tax.

"I'm concerned about $20 trillion in debt, so I think we should seriously consider maintaining some of the tax revenue that funds those subsidies," said Sen. Ron Johnson (R., Wis.).

Other Republicans are resisting the change, saying the taxes were imposed as part of the ACA and should be repealed as part of the GOP's pledge to do away with the law.

"I don't remember anybody going around saying, 'Oh, except for these job-killing tax increases,' " said Sen. Pat Toomey (R., Pa.) "So I expect that we'll be repealing all the taxes."

Capital-gains income is concentrated at the top of the income distribution, and more than 90% of the benefits of the cut would go to the top 1% of households. Democrats have contrasted the proposed tax cut with the GOP bills' proposed cuts to Medicaid, the government program that provides health insurance for those with low incomes, painting the GOP proposals as a giveaway to the rich at the expense of the poor.

"It's a step in the right direction," Sen. Claire McCaskill (D., Mo.) said of the GOP movement away from the tax cut. "Progress, but they've got a lot more work to do."

To some Republicans, doing away with the investment-income tax is important because, they say, the higher taxes created under the ACA are slowing investment and economic growth.

Keeping the 3.8% tax also would add another issue for Republicans to address in the coming debate over revising the tax code, making that effort more complicated. If the investment taxes remain in the tax code after a health law is complete, conservatives and small-business groups will press again to repeal the taxes.

But including the investment tax cut in the broader effort would tilt the plan toward the top earners, putting pressure on Republicans to rethink some of their other plans.

Mr. Rubio said Thursday he was open to keeping the investment tax, but "only if it's part of a plan that works, not simply just growing government."

Mr. Corker said it appeared the repeal of the 3.8% tax wouldn't be included in the next version of the Senate health bill, which is being written by GOP leaders. The idea, he said, is that the money would be used instead to make insurance more affordable for low-income households.

Pairing the investment tax repeal with a cutback in subsidies to lower-income Americans isn't "sustainable," Mr. Corker said.

"'It is an inappropriate proposition to lower the tax on the wealthy and increase the burden on the poor," he said. "My goal is to not necessarily focus on the wealthy. My goal is to make sure we're dealing with the poor."

Some Republicans, under pressure to rack up political achievements now that they control the legislative and executive branches, say they may have to yield on some of their priorities to get to a majority on difficult issues.

"At the end of the day," said Sen. Tim Scott (R., S.C.), "we need to get this in the best position to pass."

--Kristina Peterson contributed to this article.

Write to Richard Rubin at richard.rubin@wsj.com and Siobhan Hughes at siobhan.hughes@wsj.com

(END) Dow Jones Newswires

June 29, 2017 15:46 ET (19:46 GMT)