The Trump Administration and House GOP Leadership are calling for sweeping changes to U.S. spending priorities, healthcare, and taxes. House GOP committee leaders released Obamacare repeal-and-replace legislation late Monday; and the Administration is planning to transmit to Congress budget details in a “skinny budget” on Thursday, March 16, 2017 (with a full budget to follow in May).
FY 2017 Budget Reconciliation Bill to Repeal-and-Replace the Affordable Care Act (ACA).
House GOP committee leaders released late Monday legislation to repeal-and-replace the Affordable Care Act (ACA, aka Obamacare). In order to avoid a Senate filibuster, congressional leaders are moving the legislation forward as a Fiscal Year 2017 Budget Reconciliation bill (see our blog explaining how the Senate’s Byrd Rule places limits on what can be included in a Reconciliation Bill).
The legislation is being marked up by the Ways and Means and Energy & Commerce Committees this week. The quick markup is coming under fire because Congressional Budget Office analysis and scoring of the legislation is not available. President Trump has already signaled his support for the emerging bill saying in last week’s speech to Congress, “We should help Americans purchase their own coverage through the use of tax credits and expanded health savings accounts.”
Highlights and Analysis of the House GOP repeal-and-replace legislation:
- Background—The ACA seeks to provide access to affordable healthcare for previously uninsured Americans through the following measures: (1) significant expansion of federal funds for the federal-state Medicaid program which provides healthcare to low-income Americans; (2) sizeable subsidies for low- and middle-income Americans to purchase private health insurance; (3) prohibiting insurance companies from denying coverage due to pre-existing conditions; (4) requiring insurance companies to cover children through their parents’ insurance plans until age 26; (5) require all insurance plans to provide essential benefits; (6) protect people with chronic and acute conditions, by banning lifetime caps on benefits; (7) in order to make the coverage expansion financially viable, established mandates for large employers and individuals requiring that insurance be purchased or a penalty paid; and (8) offsets federal government costs through new revenues, Medicare, and Medicaid reforms.
- The House GOP repeal-and-replace legislation would phase out by 2020 the ACA subsidies and expanded Medicaid coverage (for people not “grandfathered” into Medicaid by 2020), instead offering advanceable, refundable tax credits between $2000 and $4000 tied to age, and expanding allowable deductible contributions to Health Savings Accounts (HSAs). “Refundable tax credits” provide tax refunds more than tax liability. The tax credits would increase with age, rather than financial need, and would phase out for individuals earning more than $75,000 and joint-filers over $150,000. Discretionary grants to States would be provided for “high-risk pools” to assist people who have trouble obtaining coverage.
- Critics of this approach question whether refundable credits will be large enough to make health insurance plans affordable, arguing the credits may only be sufficient to cover high-deductible catastrophic plans—not the essential coverage the Affordable Care Act is designed to subsidize. Critics also question the relevance of deductible HSA contributions for most individuals and families on tight budgets.
- The House GOP legislation would retain the protections relating to pre-existing conditions, lifetime caps, and coverage until age 26, but eliminates the mandates that create a larger pool of beneficiaries to support the expanded coverage. Instead, the GOP draft substitutes for the insurance mandate a “continuous coverage” requirement that would allow insurance companies to impose higher premiums on people who have failed to maintain “continuous coverage.” The draft legislation would penalize individuals who let their coverage lapse, with a 30 percent increase in premiums for one year. This could be viewed as a “mandate” by another name.
- The legislation would repeal in 2018 taxes on wealthy Americans enacted to pay for the ACA subsidies including a 3.8% net investment tax and a 0.9% payroll tax surcharge on couples earning more than $250,000. The plan would also delay until 2025 imposition of the “Cadillac tax” on expensive employer-provided insurance plans. Tax Policy Center estimates the average tax cut for the top 0.1% would be $195,000.
- Major Restructuring of the Underlying Medicaid Program: In addition to phasing out the Medicaid expansion in 2020 (for people not grandfathered in), the draft legislation would restructure and cut federal payments for the underlying Medicaid program. Under the proposed overhaul, states would get capped Medicaid payments based on the number of enrollees in various categories, instead of the current system that guarantees matching federal funds for covered services.
- Initial reactions to the legislation raise questions about whether the legislation will have sufficient GOP votes to pass in the House or Senate. Some House Freedom Caucus and Republican Study Committee members object in principle to tax credits as a “new entitlement”, others object to continuation of the Medicaid expansion until 2020, and others favor a simple repeal without replacement.
- In the Senate, GOP moderates may object to Medicaid cuts in the bill. With 50 votes required for passage of a Reconciliation Bill in the Senate, the legislation cannot afford to lose more than two GOP votes since no Democratic support is anticipated. And the Senate’s Byrd Rule adds a layer of serious complexity to crafting legislative language that can withstand parliamentary objections.
Massive Shift in Funding from Non-Defense to Defense
Increased Defense Spending: In his Budget, the President will call for an increase of $54 billion in defense-related appropriations for FY 2018—the new fiscal year beginning October 1—calling the increase necessary to “rebuild the depleted military.” This is a 10% increase over the current FY 2018 statutory defense cap of $549 billion.
Advocates for increasing defense spending point to a general downward trend in defense expenditures as a percent of the economy: currently 3.3% of GDP (Gross Domestic Product) compared to 4.7% in 2010, 4.5% in 2011, 4.2% in 2012, 3.8% in 2013, and 3.5% in 2014. However, opponents of defense increases point out that in dollar terms, the U.S. spends more than one-third of global defense spending and current U.S. defense spending exceeds the combined expenditures of the next seven countries (in order of spending): China, Russia, Saudi Arabia, France, UK, India, and Germany. See FedWeb’s Defense spending page.
Decreased Domestic Spending. The President will seek to pay for the entire $54 billion defense increase with deep cuts to non–defense discretionary spending. Areas reportedly targeted for cuts include foreign aid, State Department operations, environmental protection, the Coast Guard, the Transportation Security Administration, and the Federal Emergency Management Agency. Law enforcement spending is reportedly exempted from cuts. Nondefense spending slated for increases include Veterans, Customs and Border Protection (CBP), and Immigration and Customs Enforcement (ICE).
Background: Foreign aid – including all global health, development, food, and refugee programs – adds up to less than one-half of one-percent of the federal budget–$17 billion. State Department operations are only one-fifth of 1% of the federal budget–$8 billion. The EPA (Environmental Protection Agency) budget is also about $8 billion – more than half of which is allocated for hazardous substance cleanup and grants to States. The Coast Guard, already operating under a tight budget, plays a major role in intercepting undocumented migrants and drug traffic.
Based on the magnitude of the proposed domestic cuts and the areas that are protected or increased, the cuts could significantly impact any of the following programs: food and drug safety; NIH medical research; Centers for Disease Control; mental health and substance abuse; Indian healthcare and education; education for the disadvantaged and disabled; student aid for college; vocational and adult education; low-income housing and energy assistance; NASA; air traffic control and airport construction; children & family services and childcare; pollution control and cleanup; flood control; energy efficiency and climate change research; employment and training services; development grants to states and cities; Forest Service and National Parks; nutrition programs for children, women and infants; farm research, education, rural housing and development; and timely processing of benefit payments. Click here for FedWeb’s Non-Defense Discretionary program levels and explanations.
How the Spending Caps Work: To rein in deficits, the 2011 Budget Control Act placed statutory caps on total discretionary spending for each year through 2021 – with separate caps for defense and non-defense spending. The defense and non-defense spending caps were reduced further – by prior agreement – when Congress failed to enact entitlement and tax reforms. Click here for the spending caps.
However, Congress has twice increased both the defense and non-defense spending caps – for 2014-15, then for 2016-17 – due to concerns the caps were too tight to accommodate annual funding needs for defense and non-defense priorities. The statutory spending caps for FY 2018 currently stand at $549 billion for defense and $515 billion for non-defense.
The two upward adjustments in the spending caps were based on bipartisan agreements to maintain parity in any adjustments to the defense and non-defense spending caps. Changing that agreement with a $54 billion shift from non-defense to defense spending would be a major policy shift and would require 60 votes in the Senate – making the massive shift in spending priorities politically unlikely.
Tax Reform Will Advance as an FY 2018 Budget Reconciliation Bill
Tax Reform will be advanced as an FY 2018 Budget Reconciliation Bill and is more likely to succeed than in previous Congresses for three reasons: (i) one-party (GOP) control of the White House and Congress; (ii) the intention of the President and GOP congressional leaders to use the filibuster-proof FY 2018 Budget Reconciliation process to enact tax reform; and (iii) similar tax reform goals in the House GOP Tax Reform Blueprint released on June 24, 2016 and the Trump proposal laid out in three speeches last year (August 8, September 13, and September 15, 2016).
Highlights of the House GOP and Trump plans follow:
Rate Reductions and Simplification:
- Both plans would reduce the current number of individual tax brackets from seven to three, and reduce the top rate from 39.6% to 33%;
- House plan would allow individuals to deduct 50% of their capital gains, dividends, and interest income, reducing the top rate on such income to 16.5%.
- Both plans would eliminate the Alternative Minimum Tax (AMT);
- Taxes would drop at all income levels under both plans, although tax savings would be concentrated in the highest-income households, with the nonpartisan Tax Policy Center estimating that three-quarters of the House-proposed tax cuts and close to half of the Trump-proposed cuts would benefit the top 1% of taxpayers;
- Both plans would repeal Estate and Gift Taxes, which currently impact only the top 0.2% of families (the repeal costs more than $174 billion over 10 years);
- In a move that would increase taxes on some upper income taxpayers, the Trump plan would eliminate the carried interest loophole that currently allows managers of investment funds to treat the bulk of their earnings as preferentially taxed capital gains;
- Both plans would increase the standard deduction and repeal personal exemptions;
- House plan would repeal all itemized deductions except those for charitable contributions and mortgage interest, while the Trump plan would cap itemized deductions;
- House plan would increase the child tax credit and create a new credit for other dependents;
- Trump plan would add a new deduction for child and dependent care and would increase the Earned Income Tax Credit.
Business Tax Reforms:
- Background: The U.S. Tax Code generally taxes corporations headquartered in the U.S. on their worldwide profits at a rate of 35 percent — with a credit for foreign taxes paid and indefinite deferral of taxes on income invested offshore. Other advanced economies utilize a territorial tax, which taxes the domestic income of a corporation, but exempts most foreign income. (CRS report explaining that no country has a pure worldwide or a pure territorial system but favors one approach or the other.)
- Corporate Tax Rate Reduction: House would reduce the corporate rate to 20%; Trump plan would reduce the rate to 15%.
- Tax Relief for “Pass-Throughs” (i.e., sole proprietorships and partnerships taxed under individual rates): House plan would set a top rate of 25% for pass-throughs, while the Trump plan would set the rate at 15%.
- Shift to Destination-Based, Border-Adjusted Tax System: Under House plan, US imports would be taxable and US exports would be tax exempt. Unlike the current worldwide system, this “destination-based” tax is aimed at not placing US multinationals at a disadvantage because all production for domestic consumption, whether by US or foreign firms, would be taxable. And unlike a territorial system, the destination-based system seeks to discourage overseas production by US multinationals because all production for US consumption would be taxable. However, according to TPC, “it appears unlikely that such border adjustments would be permissible under current international trade law,” and the proposal is also drawing major pushback from the retail industry due to impact on prices for imports.
- US would no longer tax repatriated profits generated from overseas sales, but both plans would impose a transition tax on existing unrepatriated earnings of US foreign subsidiaries (and the Trump Administration has identified these revenues as a potential source of funding for infrastructure projects).
- Under both plans, investments could be immediately deducted (rather than depreciated over time), but interest expenses would no longer be deductible.
Will Reforms be Temporary or Permanent? Many will recall the 10-year expiration of the 2001 Bush tax cuts. This was imposed due to the U.S. Senate’s “Byrd Rule.” Under that rule, if Congress opts to use the filibuster-proof “Budget Reconciliation” procedures to fast-track tax or entitlement reforms, the legislation is barred from including provisions that would increase long-term deficits. In 2001, to comply with the Byrd Rule, the Bush Administration opted to sunset their tax cuts after 10 years, rather than paying for the tax cuts with offsetting revenue increases.
Trillions in Offsets Required to Pay for the Tax Cuts: Unlike 2001, House Speaker Paul Ryan’s intention is to pay for the new tax cuts to avoid a Byrd Rule violation – enabling the tax changes to be permanent. However, fully paying for the cuts is an enormous challenge. The nonpartisan Tax Policy Center estimated the Trump tax plan would increase the public debt by $7 trillion in the first decade following enactment, while the House GOP plan would increase the debt by $3 trillion in the first decade — unless fully paid for by revenue increases or mandatory spending cuts.
Timing — Tax Reform Will Wait in Line until after ACA Repeal-and-Replace: One additional consequence of using the filibuster-proof “Budget Reconciliation” procedures is that tax reform must “get in line” behind legislation to repeal-and-replace the Affordable Care Act, because that legislation must be completed before a “new Reconciliation process” can begin. Consequently, look for tax reform to carry over into 2018, for procedural reasons as well as the extraordinary complexity of negotiating comprehensive individual and corporate tax reform, and the even greater complexity of figuring out how to pay for it.