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| House and Senate Begin Conference on Tax Reform |
In the early morning hours last Saturday, the Senate voted 51-49 to pass their tax reform budget reconciliation legislation. It followed the House’s vote on their plan last month, paving the way for the two chambers to begin the conference process to mend the two versions. Both bills call for adding roughly $1.5 trillion in new national debt as part of an overhaul of the nation’s Tax Code, but the versions arrived at that amount with noticeable differences, including eliminating the ACA’s individual mandate penalties. The final conference report will need to be passed once again by both chambers in order for it to be sent to President Donald Trump to be enacted into law.
With regards to healthcare, NAHU is encouraged that neither version has altered the employer exclusion of health insurance, nor is the final conference bill expected to include such language. The major healthcare provision that was included in tax reform is the elimination of the ACA’s individual mandate penalties beginning in 2019, which was included in the Senate version but not in the House version. The House’s Republican Study Committee, a group of 155 members of the chamber’s 240 Republican members, had pressed leadership to add an amendment to their legislation prior to their vote last month to eliminate the penalties from 2015 forward. House Speaker Paul Ryan (R-WI) rebuffed them saying, “We didn't want to complicate tax reform and make it harder than it otherwise would be.”
NAHU has concerns with the overall impact on market stability that would come from effectively eliminating the individual mandate, as this would result in only those who need healthcare services from seeking coverage while those who are healthy remain uninsured. Ultimately, this could result in a death spiral of the individual market, as rates perpetually increase with only the sickest consumers remaining insured. While we are not necessarily supportive of the ACA’s individual mandate, we believe there should be some enforcement mechanism, such as a continuous coverage requirement that includes a lockout period or increased premium costs. These have not been suggested in the tax reform proposals but had been offered by Congressional Republicans in the debates on health reform earlier this year. House Republicans are expected to support the Senate’s provision to eliminate these penalties without implementing an offsetting enforcement mechanism.
The other major healthcare item that needs to be resolved is over the medical expense deduction. The Tax Code currently provides for individuals to deduct any medical expenses in excess of 10% of their adjusted gross income (AGI), including premiums that are not paid for with pre-tax income. Roughly 9 million individuals claim this deduction annually, largely by those with significant long-term care expenses. The House version as-passed completely eliminates this deduction, while the Senate version would temporarily expand the deduction by reducing the threshold to 7.5% of AGI. Representative Kevin Brady (R-TX), Chairman of the House Ways and Means Committee and leader of the tax reform conference, has suggested they may retain the deduction following the outcry from many of the House Republicans’ constituents.
The Senate can only afford to lose at most two Republican votes for final passage. The only no-vote on the legislation last week was by Senator Bob Corker (R-TN), who opposed it on the basis that tax reform should be revenue-neutral and not add any new debt. As it is unlikely that the tax reform package will come anywhere close to meeting his requirements, it is highly unlikely that he will ultimately vote in favor of the final package. There are several other Republicans who voted in support last week but have offered wavering support, most prominently Senators Susan Collins (ME), Jeff Flake (AZ), Ron Johnson (WI) and John McCain (AZ). Collins and Flake are the most likely to flip their support based on demands.
Collins has said her vote would be contingent on the passage of market stability legislation in both chambers. This includes language from a bill she offered with Senator Bill Nelson (D-FL) to provide $5 billion annually over two years for states to establish invisible high-risk pools or traditional reinsurance programs, as well as the Alexander-Murray market stability bill to provide temporary funding of the ACA’s cost-sharing reduction program. Senate Majority Leader Mitch McConnell (R-KY) claims he agreed to support the passage of these bills, but offered no firm commitment that either bill would, in fact, be passed, let alone was he able to claim they could be passed in the House. House Speaker Paul Ryan has said he was not part of these negotiations and has not offered his support to pass either bill, and House Republicans have indicated they are not interested in passing the market stability bills in exchange for her vote.
Similarly, the House has retracted from the deal worked out by McConnell and Flake to pass the Deferred Action for Childhood Arrivals (DACA), legislation protecting the children of undocumented immigrants. As with Collins, Flake voted in favor of the Senate’s tax reform bill on the premise of McConnell’s promise. But House Republicans, particularly among the most conservative members, have expressed no interest in supporting such a policy, calling DACA a form of amnesty for illegal immigrants, and thereby jeopardizing Flake’s support. If both Flake and Collins vote against the final package, along with Corker remaining opposed, there would not be enough votes for final passage. If the conference bill were to fail on a final vote in either chamber, the tax reform reconciliation process would be exhausted and not be allowed to be reconsidered through the current FY 2018 budget reconciliation.
The Senate vote is also complicated by the Alabama Senate special election next Tuesday, where both Democrat Doug Jones and Republican Roy Moore have vowed to oppose the tax reform plan, albeit for very different reasons. This is pushing Republicans to pass the plan in the coming weeks and prior to either being seated. The winner is not expected to be seated until early January, as the race will not be certified until December 26 when the canvassing board reports, although it is likely it will not conclude until January 3 at the earliest. In the meantime, interim Senator Luther Strange is expected to vote in favor of the tax reform package.
The House needs at least 217 votes for passage, meaning that Republicans can only afford to lose 23 of their members, assuming no Democrats cross the aisle to vote in favor. The vote in the House last month included defections by 13 Republicans, and final negotiations will have to walk a fine line to ensure they don’t lose more than 10 additional votes. Repealing the individual mandate penalties may lose a handful of these votes, which will make many of the other provisions not related to healthcare critical for passage in the chamber. Much of this focus has been on provisions relating to the deductions for mortgage interest and state and local taxes, which largely impact high-tax urban and suburban areas where a handful of moderate Republicans represent constituents who would be disproportionately affected. These are major pay-for provisions in the tax reform package, meaning that winning their support would come at the cost of potentially putting the bill over budget.
NAHU is generally supportive of the tax reform package as currently proposed, despite our enumerated concerns. We are primarily focused on ensuring that any tax reform proposal does not cause significant market disruption in either the individual or group markets or make fundamental changes to employer-sponsored insurance coverage. Beyond that, we continue to advocate a further delay or permanent repeal of the health insurance (HIT) and Cadillac/excise taxes, which have not been addressed thus far in tax reform. The Cadillac tax will impose a 40% excise tax on health plans that exceed certain cost thresholds beginning in 2020, while the HIT is currently under a one-year moratorium and is set to take effect again next year, adding an additional $500 to average premiums per affected family every year.
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