Congressional legislative agenda dominated by the intermix of health care and tax issues

Health care and tax issues are at the top of the US legislative and regulatory agendas in 2017, as Republican majorities in the House of Representatives and the Senate work on legislation to repeal and replace key provisions of the Affordable Care Act (ACA) and to reform the tax code for both businesses and individuals. Republicans are using the budget reconciliation process to advance health care to make it easier to bring the legislation up for a vote in the Senate so long as certain conditions are met. They are expected to use a similar process for tax reform. Specifically, all provisions of legislation considered under budget reconciliation must be related to the federal budget deficit, taxes, mandatory spending programs (like Medicare or Medicaid but not Social Security, which is exempt from reforms under budget reconciliation) or the federal debt limit. Provided these and a few other conditions are met and the Congressional Budget Office (CBO) does not project that the bill will increase the federal budget deficit outside the operable budget window, the Senate can bring up legislation for a vote and pass it with a simple majority of 51 votes.

Congressional Republicans are at work on both legislative efforts but have encountered some political and policy challenges in their efforts thus far. In addition, the congressional calendar – i.e., the finite number of days the House and Senate are scheduled to be in session and a number of significant legislative deadlines in the fall of 2017 that could occupy considerable time, energy and political capital – could hinder congressional Republicans’ legislative efforts and limit what is enacted in the first year of President Trump’s administration.

Key highlights of the legislative process and the health care and tax legislative proposals under consideration are provided below.

Budget process and impact

After the new Congress took office in early January 2017, an immediate order of business was to process a budget resolution for the remainder of fiscal year (FY) 2017 including instructions under the budget reconciliation process allowing for repeal of key provisions of the ACA. Although FY 2017 for the federal government began October 1, 2016, the FY 2017 budget resolution was still available because the Congress had not approved a FY 2017 budget resolution in 2016. The goal of Republican leadership is to use the FY 2017 budget process to provide for repeal and replacement of the ACA via budget reconciliation, while reserving the FY 2018 budget resolution to provide for tax reform via budget reconciliation. Republican leaders chose to prioritize action on health care in part because repeal of the ACA via budget reconciliation could facilitate the repeal of tax provisions accounting for several hundred billion dollars in revenue to the federal government from 2017-2026 along with commensurate reductions in federal health care spending. Enactment of such legislation would set the stage for congressional Republicans to further reduce tax rates without having to come up with the corresponding revenue that would be required to hit desired revenue targets.

Better Care Reconciliation Act (BCRA)

The Senate, on June 22, 2017, released a working draft of the Better Care Reconciliation Act (BCRA), building off of the American Health Care Act (AHCA), which the House passed on May 4, 2017. Senate Majority Leader Mitch McConnell, on June 27, 2017, announced that he would aim to hold a vote on the Senate bill after the July 4 congressional recess to allow for continued negotiations in an effort to secure the support of at least 50 Republican senators (and if necessary, Vice President Pence in his role as President of the Senate to break a 50-50 tie). No Democrats have indicated any inclination to support the bill, putting a premium on securing near unanimity among Senate Republicans.

In general, the BCRA would:

  • Reduce federal health care spending;
  • Nullify the individual and employer mandates by setting the tax penalties to $0;
  • Redesign advanceable, refundable tax credits primarily for lower income individuals who do not have access to employer-sponsored coverage;
  • Restructure and limit the growth of federal Medicaid funding to the states;
  • Repeal most taxes and fees enacted under the Affordable Care Act (ACA); and
  • Provide federal funding for state programs intended to help stabilize and reduce health insurance premiums in the non-group market.

The CBO on June 26, 2017, projected that the BCRA would reduce the federal budget deficit by $331 billion “on budget” from 2017 through 2026, or by $321 billion on net taking into account interactions with other federal spending. Under the budget reconciliation rules, the BCRA must reduce the federal budget deficit by at least $133 billion over 10 years, the amount of deficit reduction that the CBO projected would result from the House-passed AHCA.

Notably from a tax perspective, the BCRA working draft would effectively nullify the ACA’s individual and employer mandates by setting the associated tax penalties at $0 for tax years beginning on or after January 1, 2016. The BCRA also would repeal ACA taxes and fees directly affecting health care industry stakeholders, including the health insurer fee, the medical device excise tax, and the branded prescription drug fee. With exception of the tax penalties for the individual and employer mandates, the BCRA provisions highlighted above would take effect retroactive to January 1, 2017.

In addition, the BCRA generally would repeal ACA provisions that further limited contributions or further restricted the use of tax-preferred health savings vehicles, including health care flexible spending arrangements (health care FSAs) and health savings accounts (HSAs). These BCRA provisions would take effect beginning in tax year 2018.

With regard to personal taxes, the BCRA would repeal provisions of the ACA that applied an additional hospital insurance (HI) tax of 0.9% on income exceeding $200,000 annually ($250,000 for joint filers), as well as a tax of 3.8% on net investment income exceeding certain thresholds. For a joint return or surviving spouse, the threshold is $250,000. A threshold of $125,000 applies to a married individual filing jointly, and a threshold of $200,000 applies in all other cases. The BCRA would repeal the 0.9% HI tax effective for tax years beginning on or after January 1, 2023, while the repeal of the tax on net investment income would be repealed effective for tax years beginning on or after January 1, 2017.

To the chagrin of many health care stakeholders, the BCRA would not repeal the excise tax on high cost employer-sponsored health coverage, the so-called Cadillac tax. Instead, the bill would further delay the tax to 2026. Legislation enacted in 2015 first delayed the initial effective date of the Cadillac tax from 2018 to 2020.

Tax reform

Passing comprehensive tax reform legislation that lowers tax rates for business and individual taxpayers while simultaneously broadening the tax base by eliminating or limiting longstanding tax deductions, credits, and other tax incentives is another top priority for President Trump and the Congress. Comprehensive tax reform bills have not yet been introduced in this session of Congress. President Trump has put forward principles that he would like tax reform legislation to reflect, including lower business and personal tax rates and a one-time repatriation holiday that would allow corporations to return to the U.S. profits generated abroad and currently held overseas at a lower tax rate. House Republican leadership put forward a tax reform blueprint in 2016 that generally is consistent with the principles outlined by President Trump but also include some provisions, such as moving to a border adjustable tax,that have generated substantial controversy. Senate Finance Committee Chairman Hatch recently issued a letter calling for stakeholders to provide feedback on tax reform legislation by July 17th.

If the effort to repeal and replace the ACA is enacted into law, additional health care provisions could still be considered in a tax reform bill. One of the largest concerns for the employer community is that the BCRA would not fully repeal the Cadillac tax. Instead, the bill would further delay the tax to 2026. A group of 55 employer organizations on June 9, 2017, sent a letter to the US Senate urging lawmakers to “avoid any actions that could destabilize the employer-sponsored health care system.” The letter specifically warns against preserving the 40 percent “Cadillac Tax” or imposing limits on the individual tax exclusion for employer-sponsored health coverage. Notably, the individual tax exclusion for employer-sponsored coverage is one of the largest tax exclusions, projected to reduce federal income tax revenue by $165 billion for 20171, though efforts to limit or restrict it are seen as unlikely given the opposition such a move would spark.

If the Congress fails to pass a major bill to repeal and replace the ACA, we still might see modest changes to certain health provisions given the overlap of US tax and health policy. Congressional Republicans could use the tax reform process to enact policies focused on tax incentives for health coverage and to repeal certain taxes and fees. If the House and Senate are able to reach an agreement on an FY 2018 budget resolution and resolve other competing policy and political pressures, Congress could  revisit the penalties under the individual and employer mandates as well as the ACA taxes and fees in a tax bill. Republicans in both chambers have put forth tax proposals to cap the individual tax exclusion for employer-sponsored plans, and to increase the limit on contributions to HSAs and create new incentives for individuals to participate in HSA-compatible health coverage.

For the life sciences sector, in addition to the repeal of the medical device tax and the drug manufacturer fee, the provision to allow for a one-time repatriation of foreign-source income at a lower tax rate is a high priority. In addition, while the “research” credit was extended permanently in 2015, Congress is considering options to make the credit “more effective.”

Outlook

Health care and tax reform remain two of the highest legislative priorities for President Trump and the Republican controlled House and Senate.

The two efforts are intermixed in a delicate and complex budget process for fiscal years 2017 and 2018. The outcome of the effort to repeal and replace the ACA has a direct impact on the timing, revenue impact, and additional health provisions that may be contained in the tax reform effort.

All sectors should pay close attention to both debates in terms of major changes to our health care and tax system in the US.

Senate Republican leadership has not set a hard deadline for consideration of BCRA. A number of Senate Republicans have voiced support for voting on the bill prior to the August congressional recess. The House and Senate are scheduled to adjourn for the recess on July 28, 2017 and not return until after Labor Day.  In addition to navigating the difficult waters of health care during that time, Congress may also need to act to raise the federal debt limit in July, a vote Members never like to take but that is necessary to ensure the US does not default on its debt.  Expect substantial political maneuvering as the drop-dead date for action on the debt limit approaches.

To date, Republican congressional leaders have not put forward a FY 2018 budget resolution including reconciliation instructions for tax reform in an effort to maintain the privilege of the FY 2017 budget reconciliation instruction.

Congressional rules prohibit two budget reconciliation vehicles from being active simultaneously, so the House and Senate can’t come to an agreement on an FY 2018 budget resolution until they have passed or given up on the effort to pass the AHCA.

Authors:

Anne Phelps
Principal | Deloitte Risk and Financial Advisory
US Health Care Regulatory Leader
Deloitte & Touche LLP
Latest conversations from Anne Phelps on Twitter

David Green
Partner| Life Sciences and Health Care Tax Leader
Deloitte Tax LLP

Jon Traub
Managing Principal | Tax Policy
Deloitte Tax LLP

Daniel Esquibel
Senior Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

1“Estimates of Federal Tax Expenditures for 2016-2020,” Joint Committee on Taxation, January 30, 2017.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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