Republican efforts to pass a health-care bill have revealed a party fissure on tax policy with potentially far-reaching repercussions.
In his latest attempt to rewrite President Barack Obama's signature health-care law, Senate Majority Leader Mitch McConnell (R., Ky.) retained a 3.8% investment-income tax and a 0.9% payroll tax that apply to individuals earning more than $200,000 and married couples earning more than $250,000.
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The decision to keep the taxes instead of repealing them satisfied senators such as Mike Rounds of South Dakota and Bob Corker of Tennessee who were worried about losing revenue sources and about the optics of reducing taxes on high-income households. But it infuriated conservatives who see the taxes as a drag on economic growth and view removing them as an important part of repealing the 2010 Affordable Care Act.
"They're all wusses," said Larry Kudlow, the CNBC economic commentator. "How is it possible after all these years of studying the capital-gains tax? How is it possible that they don't know that [cutting] it promotes growth?"
The party's longstanding focus on lowering marginal tax rates to spur investment and growth is colliding with some members' concerns about the merits and politics of cutting taxes for businesses and high-income households while proposing other policies, in this case on health care, that could place a greater financial burden on low-income households.
The challenge could re-emerge when the party moves on later this year to an effort to rewrite U.S. tax law.
"I thought it important that we recognize that if we're offering the benefit that we should also try to offer a revenue source and that's part of the responsibility that we've got," Mr. Rounds said. "I know it's still a burden on them, but it's not near the burden on [high-income households] as would be to individuals in that $0-to-$36,000 pay range."
Independent estimates of the blueprints from House Republicans and the Trump administration show the bulk of benefits from their plans accrue to the top of the income ladder, though no plans are final and the president has promised a middle-class tax cut.
At some level, health care may be a unique case, with policy boundaries set by the Affordable Care Act, widely known as Obamacare, and the potentially visceral reaction to tax cuts twinned with coverage losses.
But the retention of the ACA taxes may indicate the emergence of a Republicanism that, while not favoring tax increases, is less comfortable with focusing tax cuts on high-income households. President Donald Trump himself has occasionally flirted with populist rhetoric on tax policy, and his campaign last year resonated in some areas of the country struggling with economic decline.
The past week shows "the waning power of the supply side, pro-growth anti-tax wing of the Republican Party," said James Pethokoukis, a columnist and blogger at the conservative American Enterprise Institute. It's "a moving away from the more extreme tax-cut positions."
The two ACA taxes in question each affect fewer than 3% of households. Republicans opposed the taxes along with the rest of the health law, but the ACA's core structure -- tax increases at the top used to pay for broader health-insurance coverage -- meant that undoing the taxes would lead to the reverse.
To most House Republicans, that wasn't a problem. The tax increases, they argued, were holding the economy back, so repeal would be an economic boon. Their bill repealed the investment tax retroactively for 2017 and ended the 0.9% payroll tax in 2023.
"I'm much more concerned about us keeping our word and we said we were going to get rid of Obamacare," said Rep. Jim Jordan (R., Ohio).
That idea fell flat in the Senate for several reasons. One is the slim margin, where any three Republican senators can band together to kill an idea. A second is the rule allowing unlimited amendments on reconciliation bills that avoid a filibuster. That means Democrats could force politically rough votes -- such as retaining the investment tax and using the money to help near-retirees afford health care.
"It shows how incredibly unpopular cutting taxes for the wealthy is and how powerfully that criticism has broken through and I think affected how some senators seem to be viewing this bill," said Harry Stein, director of fiscal policy at the Center for American Progress, a think tank aligned with Democrats.
Few, if any, House Republicans have ruled out voting for the Senate health-care bill because it doesn't repeal the taxes.
Instead, the pressure would transfer to the tax bill. Republicans had assumed they would have already accomplished a big piece of their tax-cutting agenda in the health bill. Now, that task is harder. Removing the Obamacare taxes could require finding money elsewhere, or the taxes could just remain in place.
"We'd have to find the offsets in another place, be flexible and try to find another place," said Rep. Kenny Marchant (R., Texas). "And the people in the other place might not be happy about it."
House Republicans have said repeatedly that they aren't particularly concerned about how their plan changes the tax burden for different income groups, saying their main aim is to generate broad economic growth.
"My fixation is what maximizes economic growth for everyone," said Rep. David Schweikert (R., Ariz.), who added: "We're in real, real trouble if we don't get some dramatic economic growth."
The Senate's experience on health care suggests that those distinctions between income groups will matter politically and legislatively, and some House Republicans are making their tax plan with that dynamic in mind.
"Benefits like the mortgage interest deduction should be more targeted to help lower and middle income people as opposed to wealthier Americans, " said Rep. Carlos Curbelo (R., Fla.). "I think you're going to see a balance in our tax reform package."
Write to Richard Rubin at Richard.Rubin@wsj.com
(END) Dow Jones Newswires
July 17, 2017 05:44 ET (09:44 GMT)