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The Tax Implications of the Senate Healthcare Bill

Jun 29th 2017
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The Senate healthcare bill, otherwise known as the Better Care Reconciliation Act (BCRA), is under heavy pressure as groups opposed to the bill claim that it is nothing more than the tax cut for the wealthy which will kill Americans by denying them medical coverage. Even both moderate Republicans as well as the hardline Freedom Caucus have blasted the bill for either doing too much or not doing enough, and it remains unclear whether the BCRA will pass.

But for accountants, it is important to put our political lenses aside and take a hard look at this legislation’s tax provisions. We must objectively analyze these provisions to uncover the general tax implications and how this affects the different economic classes.

The Important Repeals

Any tax discussion around the BRCA must discuss the charge that it disproportionately benefits the rich. The Tax Policy Center states that about two-thirds of the tax benefits of the BCRA will benefit the top quartile of American earners and that “that nearly 45 percent of the benefit of those tax cuts would go to the highest-income one percent of households, those making $875,000 or more.”

Certain tax changes will have the biggest impact on individual taxpayers, particularly one called the “unearned income contribution tax” or the “net investment income tax.” This was the largest new tax enacted in 2010 to help pay for expanded health care coverage.

This tax slaps an additional 3.8 percent Medicare tax on investment income such as interest, dividends, and royalties. It applies to single individuals making more than $200,000 or couples with a gross income of $250,000. A Tax Policy Center analysis stated that almost all the burden of this tax “will be borne by taxpayers with extremely high incomes.”

The BRCA repeals this tax. Furthermore, it also repeals an additional 0.9 percent Medicare tax on wages and self-reported income, though that repeal will not take effect until 2023. And in general, the BRCA removes many of the tax hikes which were introduced by the ACA and thus will reduce taxes by $700 billion over the next decade. However, while it appears that all sections of the U.S. population will experience lower taxes to some degree, these proposed changes will disproportionately benefit wealthy taxpayers.

The End of the Mandate?

Another interesting tax change is that in both the Senate’s BRCA and the House’s American Health Care Act (AHCA), individual and employer mandates are repealed. In fact, the two bills say that individuals who had to pay a penalty for going without insurance in 2016 could seek retroactive relief.

The decision to repeal the individual mandate is hardly surprising, as it has been a sticking point behind conservative attacks on the Affordable Care Act (ACA.) But healthcare experts have repeatedly warned that some form of mandate is necessary in any healthcare bill. Otherwise, young individuals would not bother to purchase insurance, leaving only at-risk individuals in any health insurance pools.

As a result, both the House and the Senate actually do have individual mandates, but they are different from the ACA. According to The Atlantic, the AHCA would mandate that individuals who had been without health insurance for 63 days would have to pay a 30 percent premium surcharge when signing up with an insurance company. This would help in the speedup of robotic process automation. The BRCA by contrast would have individuals pay no penalty, but they would be barred from the health insurance market for six months.

Such a move would in theory reduce risks. But it is easy to see exceptions being made when stories of some poor individual who could not afford insurance for a short period and was then denied insurance right when afflicted with some terrible disease inevitably crop up. From an accounting perspective, this mandate change could temporarily save costs for those who choose to go without insurance.

No Overreactions

There are other interesting tax moves to discuss such as the GOP plan to reduce taxes on flexible savings accounts, medical devices, and “Cadillac” insurance plans. However, the major concern that the GOP plan will disproportionately benefit the rich and lock the lower classes out of good health insurance has some validity.

But analysts should remember that this Senate bill will almost certainly not be the final version of the bill. Even if we suppose that this bill should pass (and that is a titanic “if” as it stands right now,) the Senate and the House have passed separate bills drafting a replacement for the ACA and will have to hold out a conference to hash out the differences.

Accountants whose clients are concerned about the tax and insurance implications of the GOP health plan should caution them not to overreact whether positive or negatively until the final details of the final bill are released. Also remind them that there is no guarantee any new health bill will be passed and the ACA may continue to be law.

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