On Wednesday, the Trump Administration provided a rough outline of its tax reform plan in a press conference by Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn. The plan, “2017 Tax Reform for Economic Growth and American Jobs,” claims to be the largest tax cut for businesses and individuals in American history. At this time, the plan does not include any proposal to eliminate or cap the employer exclusion
of health insurance, although NAHU will continue to monitor the tax-reform efforts as the Administration works out the details with Congress on a legislative package, expected to be advanced later this year.
The tax-reform plan calls for simplifying the Tax Code, reducing the corporate tax rate from 35% to 15%, and reducing the current seven individual tax brackets to three at 10%, 25% and 35%. It also calls for doubling the standard individual deduction and providing tax relief for families with child and dependent care expenses, in addition to repealing the Alternative Minimum Tax and the ACA’s 3.8% tax on investment income. These changes would be paid for in part through a one-time tax on overseas holdings.
Tax reform is likely to be advanced through a separate reconciliation package later this year. The Congressional Budget Act permits only one reconciliation vehicle per budget resolution, but because Congress didn’t pass a budget for fiscal year (FY) 2017 in 2016, they will be able to advance both FY 2017 and FY 2018 budget and reconciliation packages this year. The FY 2017 budget was passed in January, paving the way for the reconciliation vehicle to be used for healthcare, and Congress is expected to pass a FY 2018 budget later this spring that would establish instructions for using reconciliation on tax reform. This is the first time in the 43-year history of the Congressional Budget Act that Congress would pass two budget resolutions in the same year.
Many Republicans in Congress, led by House Speaker Paul Ryan (R-WI), have called for significant changes to the employer exclusion. Last year’s Republican blueprint document
, “A Better Way,” called for a cap on the exclusion, and the first iteration
of the AHCA reconciliation bill (which was not officially filed) called for a cap at 90% of the plan’s value that would be taxable for income and payroll purposes. That proposal was ultimately pulled in the current version of the AHCA. Republicans contend that modifying the exclusion would result in Americans having more control over their coverage, reduce job-lock, and result in greater transparency and reduced costs.
NAHU is very concerned about plans that would make significant changes to the exclusion, as it forms the basis of the employer-based insurance system that provides coverage to upwards of 175 million Americans. The exclusion allows an employer’s contributions to an employee’s health insurance to be excluded from that employee’s compensation for income and payroll tax purposes. Proposals that modify the exclusion could push individuals from group coverage into the individual market, which would be ripe for adverse selection, leading to higher insurer losses participating in these markets. Insurers would likely offset these losses by reducing provider networks and increasing cost-sharing. Many of the inherent problems with the Cadillac/excise tax
would exist for modifying the employer exclusion.