The voices of Tax Policy Center's researchers and staff
House Speaker Paul Ryan (R-WI) began this year with two ambitious goals—rewriting the tax code and fundamentally remaking the nation’s system of health care financing. But his health plan includes major tax changes. Are they consistent with his vision of a new tax code?
Not surprisingly, the answer is: some are, and some are not.
This was the overall goal of the tax plan proposed by House Republicans last June:
“For families and individuals, the new tax system will simplify and lower tax rates. It will also provide for reduced but progressive rates on capital gains, dividends, and interest income. In addition, the changes will significantly reduce the complexity and compliance burdens of the current system. The approach…will be simple enough to fit on a postcard for most Americans.”
How do they tax changes in the health bill stack up against those goals?
The House plan would repel a number of taxes on health-related business. But let’s just focus on its individual tax changes, which would eliminate several taxes in the Affordable Care Act and, at the same time, create or expand health-related tax subsidies. The plan would repeal:
- The additional 0.9 percent payroll tax on earnings and the 3.8 percent tax on net investment income for individuals with incomes exceeding $200,000 ($250,000 for couples).
- Penalty taxes on individuals without adequate health insurance coverage.
- The Premium Tax Credit, an income-based refundable credit to help individuals and families purchase health insurance through state and federal marketplaces.
- Limitations on Health Savings Accounts (HSAs). The bill would increase contribution limits and reduce penalties on withdrawals to pay non-medical expenses.
At the same time, the bill would create new tax benefits to subsidize health costs. They include an age-based refundable tax credit (the older you are, the bigger the credit) that would phase out for those making $75,000 ($150,000 for couples). It would also expand HSAs and Flexible Savings Accounts (FSAs).
Would these provisions pass the Ryan tax reform test?
Eliminating the payroll tax surcharge and the net investment tax would certainly lower tax rates for high income households and repealing the investment tax would make filing a bit simpler. At the same time, these changes would badly fail Ryan’s progressivity test.
Eliminating the penalty taxes for those without insurance would simplify filing and be progressive, at least in the context of the tax law. It would also simplify tax administration for the IRS. We don’t yet know whether abolishing those incentives to purchase insurance would result in higher premiums, leaving low-income people without affordable insurance and access to health care.
Replacing the existing income-tested premium tax credit with an age-based credit will almost surely fail Ryan’s progressivity test. Filing is likely to be somewhat simpler than under current law, though many middle-income taxpayers will still have to calculate the declining value of the credits as they phase-out.
The expansion of tax-advantaged health-related savings accounts also would be regressive since those with the disposable income to make bigger contributions are likely to have higher incomes. Reporting contributions to these savings accounts and filing for the premium credits are likely to take up much of the space on Ryan’s postcard.
Is It Tax Reform?
New credits and more generous tax-advantaged savings accounts also seem generally inconsistent with the concept of broaden-the-base, lower-the-rates tax reform. The House GOP tax bill would eliminate nearly all deductions and simplify and consolidate some family deductions and credits. Ryan’s version always intended to exempt health care and savings (and mortgage interest and charitable contributions) from his efforts to eliminate tax preferences.
That raises an important political issue. The list of protected preferences is getting long, which will make it harder for House Republicans to hold the line against those seeking to protect other tax breaks. For example, governors will argue that since the health bill would also increase burdens on state government by limiting federal contributions to Medicaid, Congress should not repeal the federal deduction for state and local taxes. The more preferences survive, the smaller the rate cuts, at least in a revenue-neutral bill.
Finally, it is also useful to look at the health law’s relationship with tax reform in another way. And that is as a means to an end. The health bill will likely cut taxes, mostly for the wealthy, by close to $1 trillion (the Joint Committee on Taxation so far has estimated the revenue effects of some of the provisions and projected the 10-year cost at about $600 billion).
That’s important because Ryan also has promised that any tax reform would not add to the long-term debt. By reducing the revenue baseline, those tax cuts would effectively lower the target that a tax bill would have to hit to be revenue-neutral. This scoring benefit helps explain why Republicans want to pass health reform before they tackle tax reform.
In sum, the House GOP’s health bill may be crucial to eventual passage of a big tax bill. But it fails many of Ryan’s own tests for success.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
House Speaker Paul Ryan of Wis., center, standing with Energy and Commerce Committee Chairman Greg Walden, R-Ore., right, and House Majority Whip Kevin McCarthy, R-Calif., left, speaks during a news conference on the American Health Care Act on Capitol Hill in Washington, Tuesday, March 7, 2017. (AP Photo/Susan Walsh)