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Tax Reform Update

Tax Reform Update

by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.

Senate Passes Tax Reform Through the “Reconciliation” Process – Conference Begins Between House and Senate to Reconcile Differences

  • Late, late Friday night, Senate Republican Leadership pulled together 51 votes to pass the Senate’s Tax Reform bill.  As you know, there are differences between the Senate version and the House-passed Tax Reform bill, which necessitates a Conference Committee of both select House and Senate members to work together to-get-on-the-same-page.  Once both the House and Senate conferees agree, then the reconciled version can be passed by each respective House of Congress.  Then, the bill will go on to the President for a signature.
    • Analysis:  If you thought failure-was-not-an-option when it came to ACA “repeal and replace,” failure-is-DEFINITELY-not-an-option when it comes to Tax Reform.  As a result, Senate Republicans got it done.  So did House Republicans a few weeks back.  The last step in the process is reconciling the differences between the House and Senate Tax Reform bills.  I believe both the House and Senate will come to an agreement over the next 2 weeks, and they will send Tax Reform to the President by the end of this year. You have heard a lot about the Tax Reform bills.  For example, headlines saying that the Senate bill would raise taxes on low-income taxpayers as early as 2021.  In my last update, I talked through why this is the case (see the attached update).  In short, repeal of the “individual mandate” penalty tax results in less people obtaining a subsidized health plan through the ACA Exchanges.  And, the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) “score” the premium subsidies as having a “tax effect” because the drafters of the ACA ran the premium subsidies through the Tax Code.  Interestingly, a couple of days after I sent out my update, CBO/JCT released a distributional analysis of the Senate’s Tax Reform bill, assuming that the individual mandate was NOT repealed.  Importantly, ALL taxpayers regardless of income saw a tax cut. As I said in my last update, I am NOT a fan of individuals leaving Federal subsidies on the table, especially when it can help them obtain health insurance.  But, leaving Federal subsidies on the table is much different than paying more in taxes (and thus experiencing a tax increase).  But most headlines don’t explain it that way. Other headlines have explained that people will see a tax increase after 2027.  This is actually true.  But unfortunately, no news stories or on-air segment explains why.  Without going into excruciating detail, the reason why the tax cuts for individuals would go away after 2027 is because the “reconciliation” rules do NOT allow a “reconciliation” bill to increase the deficit outside of the 10-year budget window (i.e., in the “out years”).  In the case of the Senate’s Tax Reform bill, Republicans are unable to “offset” the individual income tax cuts in the “out years,” which results in a deficit increase, which is a no-no under the “reconciliation” rules.  If you recall, this is how the tax cuts of 2000 worked (the so-called “Bush tax cuts”).  Those tax cuts expired because they increased the deficit in the years after 2010 (i.e., the “out years”).  And what happened to the 2000 tax cuts?  They were actually made permanent at the end of 2010.  By a Democratic Administration no less. You may ask:  So Chris, are you saying that come 2027, Congress and a future Administration will extend the tax cuts??  NO, I am NOT saying that, because we have no idea what will happen 10 years from now.  BUT, it is important to understand history.  And, it is also important to understand that IF a future Congress and Administration extend the tax cuts, they will either have to “offset” those tax cuts with increased taxes or reduced spending (like reduced “entitlement” spending), or they will simply increase the deficit yet again (quite possibly by another $1 trillion dollars). Speaking of increasing the deficit, that is what the Senate Tax Reform bill would do, according to CBO/JCT at least.  People may disagree with CBO/JCT, but as I have always told you, what CBO/JCT says…goes, period end of story.  And CBO/JCT says that the Senate bill would increase the deficit by $1 trillion.  That is NOT good.  We will just have to wait and see whether that deficit increase materializes, but knowing that it is possible is disconcerting. Which brings me to my last point:  I was asked if enacting Tax Reform is worth it?  They said, Tax Reform is “for the rich” because higher-income individuals are getting bigger tax cuts than low- and middle-income individuals.  The Senate bill also increases the deficit substantially.  Here’s my response:
      • I believe the Tax Reform bill will give ALL Americans a tax cut, which is a good thing.  Yes, higher-income individuals are getting bigger tax cuts relative to low- and middle-income individuals, but that is generally because higher-income people pay a lot of taxes in the first place, so of course tax cuts for them will seem bigger than tax cuts for people with more moderate incomes. I also believe that lowering the corporate tax rate and lowering taxes on “pass-through” businesses (which are primarily made up of smaller companies and self-employed individuals) will increase economic growth.  This increased economic growth will benefit people at ALL income levels.  For example, I do believe that employers will “give back” profits – and the taxes they would have otherwise paid to the Federal government – in the form of increased wages.  Yes, some big corporations have said they would share their profits/taxes with their shareholders (which kind of stinks if you ask me), but I do believe that many smaller- and mid-sized companies will indeed bump up wages for their workers. Also, I believe employers will “give back” to their employees in other ways, like offering health coverage at a lower cost (because the employer is increasing their contributions for health benefits) or with lower deductibles and co-pays (because the employer is willing to shoulder more risk for the ever-increasing cost of health care).  It is also likely that employers will bump-up their “match” for retirement.  Other employers may extend their paid leave for a longer period of time, or kick more money into a wellness program, or increase their HSA contributions. What I am driving at here is that there are other ways to “give back” and “compensate” employees.  I believe employers will increase their “compensation” to employees in the form of improved employee benefits.  The driving force is because employee benefits are tax-preferred.  And, the best way to make a dollar go further is by plowing it into a tax-preferred vehicle (i.e., an employee benefit).  Also, employers are most interested in retaining and attracting the best talent.  And, the best way to attract and retain talent is to offer stellar employee benefits. So, I do think Tax Reform will produce a “rising tide that will raise all boats.”  And, I think we will see economic growth in the short-run, before the deficit increase really becomes problematic.  But in the long-term, the deficit increase will loom large, as will the question:  How does Congress extend the expiring tax cuts?  From a fiscal perspective, 2030 never looked good to begin with (under current law).  If Tax Reform happens, 2030 will look that much more uglier.

Repeal of the “Individual Mandate” and the Politics of “Stabilizing” the ACA’s Individual Markets 

  • If Tax Reform happens (which I think it will), then repeal of the individual mandate penalty tax will happen (but remember, the individual mandate penalty is reduced to $0 – because of the “reconciliation” rules – but it effectively means repeal).  If the individual mandate is indeed repealed, a lot of people are saying that the markets will go hay-wire.  But, can anything be done to counter-act the negative impact repeal of the mandate may have?
    • Analysis:  As the vote on the Senate Tax Reform bill drew closer and closer, all eyes were on Sen. Collins (R-ME).  Questions abounded regarding her support – or lackthereof – for including repeal of the individual mandate penalty tax in the bill.   Interestingly, Sen. Murkowski (R-AK) publicly announced her support for repeal of the mandate prior to the Thanksgiving holiday.  Sen. McCain (R-AZ) said he would vote YES on the Senate bill – even if it included repeal of the mandate – shortly after the Thanksgiving holiday.  So again, that left Sen. Collins as the only potential Senator who might withhold their support for the overall bill on account of the mandate repeal. To get to YES on the overall tax bill – including repeal of the individual mandate – Sen. Collins “asked” Majority Leader McConnell to support not only the Alexander-Murray bi-partisan “market stabilization” package, but Sen. Collins ALSO “asked” Leader McConnell to support a bill that would provide Federal funds so States could set up a reinsurance program or an “invisible high risk pool.”  $5 billion for 2018 and $5 billion for 2019 ($10 billion total over 2 years).  To secure Mrs. Collins’ vote, Leader McConnell agreed to support BOTH measures.  And the rest is history…the only NO vote on Tax Reform came from Sen. Corker (R-TN), who was concerned about increasing the deficit. As a refresher, why did Senate Republicans include repeal of the individual mandate in Tax Reform?  In part, because Republicans want-to-make-good on at least 1 of their 7-year long campaign promises – repealing the “dreaded government coercion to purchase government-approved health insurance” (their words, not mine).  But, the main reason for including repeal of the mandate was because Senate Republicans needed the savings as an “offset.”  As you know, CBO/JCT stated publicly that repealing the mandate would save $318 billion over 10 years.  What was not stated publicly is that repeal of the mandate produces significant savings outside of the 10-year budget window (i.e., the “out years”).  And the existence of this savings in the “out years” is very, very important for purposes of satisfying the “reconciliation” rules (as I discussed above). Importantly, Republicans desperately want to make the corporate tax rate reduction permanent.  To make the corporate rate reduction permanent, Senate Republicans need to somehow “offset” the revenue loss from this tax change.  And one of the only ways Senate Republicans are able to “offset” the corporate rate reduction is by repealing the individual mandate.  Which means, repealing the mandate is CRITICAL to the overall Tax Reform efforts.  And as a result – to ensure that this critical piece was a part of the Senate bill – Leader McConnell was willing to “do what it takes” to get Sen. Collins to YES (which required commitments to move the Alexander-Murray and Federal reinsurance legislation through Congress).

Alexander-Murray “Market Stabilization” Package Hangs In the Balance

  • Recent reports indicate that House Republicans are NOT interested in enacting Alexander-Murray or the Collins Federal reinsurance bill.  House Leadership stated that they were NOT a part of the McConnell-Collins “agreement,” and therefore, they are NOT bound to moving these 2 pieces of legislation – even if the individual mandate is repealed in the final Tax Reform package.
    • Analysis:  Will the Alexander-Murray bi-partisan “market stabilization” package – and, for example, the funding of the cost-sharing subsidies – counter-act any ill-effects that may result from repealing the individual mandate?  Here is my answer:  Now that most if not all States “loaded” the premium increases attributable to the unfunded cost-sharing subsidy liabilities onto the “silver” Exchange plans – which resulted in NO premium increases for off-Exchange plans AND which resulted in higher premium subsidy amounts for all on-Exchange planholders – it does NOT make sense to fund the cost-sharing subsidies, unless you are a deficit-hawk (and do not want to spend the $194 billion in additional premium subsidy amounts).  What I mean is this:  Due to the “silver loading” practice, the premium subsidy amounts are higher, which means that the premium subsidy dollars can go further for Exchange planholders, where they can purchase “free” health coverage under a “bronze” plan or more comprehensive coverage under a “gold” plan at the same price they were paying for a “silver” plan the year before. So ironically, lower-income individuals who are NOT getting insurance through an employer are actually BETTER OFF if the cost-sharing subsidies are NOT funded.  As a result, a strong argument can be made that – ironically – choosing NOT funding the cost-sharing subsidies could be viewed as way to counter-act any ill-effects that may result from repealing the individual mandate.  What I mean is:  We all make economic rational decisions.  A penalty tax that is fairly insignificant is NOT going to drive behavior.  BUT, a generous government subsidy that allows a person to obtain a “product” or “a good” – like health insurance – at virtually NO cost is indeed going to drive behavior.  Based on this, a strong argument can be made that the higher premium subsidy amounts will translate into more people obtaining an Exchange plan (either remaining on Exchange coverage or buying an Exchange plan for the first time).  Which means, the so-called ill-effects of repealing the individual mandate – with the 5 million people in the individual market choosing to remain uninsured – will likely NOT materialize. If the increased uninsured rate does NOT materialize, that is problematic from a deficit perspective because CBO/JCT currently think repeal of the mandate will produce $318 billion in savings, the majority of the savings coming from lower premium subsidy spending (because people are choosing not to obtain an Exchange plan, and thus foregoing the premium subsidies).  BUT, the above-stated-result is a good thing from a “coverage” perspective – and from the perspective of “stabilizing” premiums – because young/healthy people won’t be dropping out of the market (and, some young/healthy people may actually enter the market for the first time to take advantage of the generous government subsidies). BTW, I do not think that most House Republicans are looking at it this way.  I believe most of them view funding the cost-sharing subsidies as a “bailout.  And to them, heck-will-freeze-over before they agree to “bailout” the insurance carriers by funding these payments.  BUT, I believe some smart House Republicans understand the phenomenon of the higher premium subsidies resulting from the lack of funding for the cost-sharing subsidies.  And, they are taking the position of opposing a “bailout” (which will resonate with their base), while also understanding that the markets may not go hay-wire if they repeal the individual mandate (although they won’t like the $194 billion in spending, and they won’t like the premium increases for the non-subsidized population).

The Collins Federal Reinsurance Bill Hangs In the Balance

  • What about the Collins Federal reinsurance bill?  Well, CBO/JCT has told us that when you pump billions of dollars into the individual market, premiums will go down.  For example, when CBO/JCT analyzed the ACA “reconciliation” repeal-replace bills this past summer, CBO/JCT found that the Federal reinsurance-like funding included in the underlying bill would reduce premiums by 15% to 20%.  Also, HHS and the State of Alaska just told us that Alaska’s reinsurance program – which came in through a 1332 Waiver – would reduce premiums by 20%.  So, if Congress wants to reduce premiums, a reinsurance program is the way to do it.
    • Analysis:  One cut against the Collins Federal reinsurance bill is that $10 billion over 2 years is NOT enough funding to substantially reduce premiums.  For example, Avalere Health just came out with a study indicating that the Collins reinsurance bill would reduce premiums by 4% in 2019.  Compare that to CBO/JCT’s previous estimate that more than $100 billion in Federal reinsurance-like funding – which as stated above, was a part of the ACA “reconciliation” repeal-replace bills – would reduce premiums by 15% to 20%.  Note, I am NOT advocating that Congress pump hundreds of billions of dollars into the individual market.  BUT, I am trying to give you perspective on how much needs to be spent to reduce premiums materially. Last comment:  Will Alexander-Murray and/or the Collins reinsurance bill get through the House?  I have 2 responses:
      • First, if Sen. Collins is the 3rd NO on the Tax Reform bill, Senate Leadership and the White House will likely put the screws to opposing House Republicans to “swallow hard” and vote YES on any legislative package that Alexander-Murray and/or the Collins reinsurance bill rides.  That way, the Senate and the White House can secure Sen. Collins as a YES vote on Tax Reform.
      • Second, if Senate Leadership does NOT need Sen. Collins YES vote (i.e., the only Republican holdout on Tax Reform continues to be Sen. Corker), then Senate Leadership can cut Sen. Collins loose, allow Mrs. Collins to vote NO, and allow the House Republicans to get their wish of NOT “improving” the ACA.  Stay tuned.

ACA Exchange Update

“Sign Ups” for an Exchange Plan Are Still Higher Than Last Year – But In the End – “Sign-Ups” Will Be Less Than Last Year

  • Reports on the number of “sign ups” at the Federal Exchange – as well as the State-based Exchanges across the country – remain strong, and actually remain higher than the “sign up” numbers we saw last year.  This includes the “sign up” numbers for new enrollees, which are much higher than last year (up by 40% or so).  BUT, despite the higher “sign up” demand, the overall numbers will be less than 12.7 million (i.e., last year’s overall numbers).
    • Analysis:  Initially, I suggested that “sign ups” would likely be around 12 million.  My thinking was this:  I disagreed with other stakeholders when they said that reducing funding for marketing and outreach efforts would depress enrollment.  I still believe this today.  Why?  Because – in my opinion – improved “direct enrollment” and renewed reliance on agents/brokers would likely make up for any enrollment losses due to marketing and outreach funding reductions. Initially, however, I over-looked the fact that “open enrollment” was ending on Dec. 15th, 6 weeks earlier than last year.  Once I understood my error, I revised my prediction downward to 10 to 12 million.  As I continue to think more about “sign up” numbers we are seeing, and looking to the upcoming deadline – which is next Friday – I am thinking “sign ups” for 2018 will probably be closer to 9 to 11 million. A lot depends on how many Exchange planholders will be “automatically enrolled” on Dec. 15th.  Last year, 1.6 million people were auto-enrolled.  I would assume we will see a similar auto-enrollment number, but that number could be lower because we are seeing evidence that people are “shopping around” (encouraged in part by the word that is getting out that people can get a “free” bonze plan or a “gold” plan at last year’s prices).  Also, some State-based Exchanges extended their deadlines to Jan. 15th or Jan. 31st.  Here, with an already increased level of “sign ups,” we will likely see record-breaking “sign ups” in those States that extended their “open enrollment” deadlines.  These record-breaking numbers will help improve the overall “sign up” numbers. The last unknown is how many people will come out of the wood work to “sign up” for a plan by the end of next week.  Over the past 4 “open enrollment” periods, we saw “surges” at the enrollment deadlines.  This year should be no different despite the truncated “open enrollment” period.  But, maybe we don’t seem the same level of a “surge” this go-around? Last comment:  ACA supporters continue to assert that the Trump Administration is purposefully “sabotaging” the ACA Exchanges by adopting policies like shortening the “open enrollment” period to just 6 weeks.  Ummm, I would like to remind people that the Obama Administration – driven by the insurance carriers’ suggestion – was first to say that “open enrollment” should only run through Dec. 15th.  Actually, the Obama Administration finalized regulations calling for a 6-week “open enrollment” period starting in 2019.  The Trump Administration simply moved up the adoption of a truncated “open enrollment” period to 2018 – at the request of…wait for it…the insurance carriers.  I just wish ACA supporters would remember the history here, instead of contending that a 6-week “open enrollment” was a politically calculated decision to depress enrollment.  Actually, if these ACA supporters have problems with a truncated “open enrollment” period, take it up with the insurance carriers.  Again, they are the reason why this policy was adopted.  Not “politics.”