A day after deciding not to vote again on health reform, a group of Republicans dubbed the “Big Six,” comprised of four congressional Republicans as well as Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn, released their draft plan for tax reform. The nine-page framework follows a general blueprint announced in April by Mnuchin and Cohn. The framework calls for reducing the corporate tax rate from 35% to 20%, reducing the individual income tax brackets from seven to three at 12%, 25% and 35%, with a possible fourth higher rate for high-income earners, doubling the standard deductions, and numerous other provisions in an effort to simplify the Tax Code. Congress is expected to formally begin the process for passing tax reform through the reconciliation process by passing a budget resolution next week.
At this time, the plan does not directly address the employer exclusion of health insurance, but the framework does note that they plan to modernize rules governing the tax treatment of certain industries and sectors and that “numerous other special exclusions and deductions will be repealed or restricted.” Many Republicans in Congress, led by House Speaker Paul Ryan (R-WI), have called for significant changes to the employer exclusion, arguing that modifying it would result in Americans having more control over their coverage, reduce job-lock, and result in greater transparency and reduced costs. This included last year’s Republican blueprint document, “A Better Way,” which called for a cap on the exclusion. Additionally, a proposed healthcare reconciliation bill by the House that was not officially filed called for a cap based at 90% of the plan’s actuarial value that would be taxable for income and payroll purposes.
NAHU is 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.
The proposed tax plan calls for streamlining much of the Tax Code to provide greater simplicity. NAHU and other industry stakeholders are concerned that many longstanding tax provisions could be modified as a way to offset any revenue losses under the plan. The employer exclusion is the largest federal tax break, estimated to cost the federal government more than $143 billion per year, followed closely by tax breaks on dividends and capital gains at $134 billion, the mortgage interest deduction at $77 billion, the earned-income tax credit (EITC) at $73 billion, and the deduction of state and local taxes at $65 billion, among others. The tax-reform plan would eliminate the deduction for state and local taxes as well as the personal exemption for individuals, which would offset much of the lost revenue from reducing the tax rates and increasing deductions. Reforms to the EITC were expected to be part of negotiations, but were not included in the framework. Additionally, while the plan retains the mortgage interest deduction, it would effectively neutralize it by making it of little value to those who wouldn’t still benefit by itemize their taxes.
The Alliance to Fight the 40 and Don’t Tax My Health Care Coalition, of which NAHU is a member, released a statement on Wednesday calling on Congress to preserve the employer exclusion and to eliminate the Cadillac/excise tax. The statement thanked lawmakers “for not including a cap on the employee exclusion for employer-sponsored coverage.” It further noted that “If Congress is committed to tax reforms that reduce the tax burden on middle class Americans, Congress should prioritize repealing the 40% ‘Cadillac tax’ on the health benefits of working Americans.”
As the Trump Administration has a stated goal of making their tax-reform plan the largest tax cut for businesses and individuals in American history, NAHU will be closely monitoring negotiations to ensure that these reforms do not come at a cost to employer sponsored insurance coverage. Initial estimates project that the plan would equate to a $2.2 trillion tax cut, of which $5.8 trillion would be lost revenue from reduced tax rates while $3.6 trillion would be gained by eliminating tax benefits. Congressional Republicans and the Trump Administration have been vague on the specifics for how they plan to ensure that tax reform would be deficit-neutral, but are expected to target other sources of revenue. Already, one of the most longstanding and favored provision in the tax code, the mortgage interest deduction, has been targeted as a source of revenue by reducing its effectiveness. NAHU is concerned that this could indicate that other favorable tax provisions, like the employer exclusion, could also be at stake.
The Senate Budget Committee began the process earlier today by releasing its 2018 budget resolution to activate the reconciliation process for tax reform. That budget resolution, expected to be voted on next week, includes instructions to allow the Senate Finance Committee to add upwards of $1.5 trillion to the deficit over the next decade. The congressional representatives of the Big Six, comprised of Senate Majority Leader Mitch McConnell (R-KY), House Speaker Paul Ryan (R-WI), Senate Finance Chairman Orrin Hatch (R-UT) and House Ways and Means Chairman Kevin Brady (R-TX), will then be tasked with drafting the legislative text to expand on the details of the framework that was released this week.