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In Search Of Votes, GOP Makes Changes To Plan To Repeal & Replace Obamacare

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Earlier this month, House Republicans rolled out their proposal to replace the Affordable Care Act ("Obamacare"). The American Healthcare Act (already dubbed "Trumpcare") was immediately met with criticism from the left and the right.

The criticism from the left was anticipated, but the criticism from the right caught many on the Hill off guard. To get the proposal through the House, Republicans will need the support of most of their colleagues. To win those folks over, the House went back to work and made some changes. House Speaker Paul Ryan (R-WI) is now hopeful that he has the 218 votes needed to push the proposal through on Thursday when it is slated for a vote.

So what do those changes look like? Here's a summary of some of the changes which might affect your tax bill:

➤ Obamacare tax repeal. It was a given that a number of taxes (like the tanning tax, Net Income Investment Tax, Medicare surtax and medical device excise tax) used to pay for Obamacare would be repealed. However, it was pretty surprising to see that, under the first GOP proposal, those taxes wouldn't be phased out until 2018. The revised proposal calls for repeal of those taxes beginning in 2017. However, the "Cadillac Tax" on high-cost health plans would remain on the books with an effective date of 2026.

The accelerated repeal makes the plan look less like Obamacare, which wins Ryan points with some in Congress. However, the costs associated with the original plan were scored by the Congressional Budget Office (CBO) assuming a more gradual repeal: yanking those taxes now will make the proposal more expensive.

➤ Increased medical expense deductions. As part of Obamacare, the "floor" on medical expense deductions increased from 7.5% to 10% in 2013 (the rate for seniors stayed in place until 2016). The original House proposal called to restore the floor to 7.5% but the revised proposal would drop the floor even further: 5.8%. Under the new proposal, the 5.8% floor wouldn't kick in until the 2018 tax year, but seniors would be able to use it immediately.

Here's a quick example of how the math works. Let's assume your medical expenses total $5,000 and your AGI is $50,000:

  • Under pre-Obamacare rules, you could deduct $1,250 of medical expenses: $5,000 (total expenses) less $3,750 (floor of 7.5% x $50,000) = $1,250.
  • Under Obamacare, using the same example as before, you would not have been able to deduct any medical expenses since $5,000 (total expenses) less $5,000 (floor of 10% x $50,000) is zero.
  • With the new proposal, using the same example as before, you would be allowed to deduct $2,100 since $5,000 (total expenses) less $2,900 (floor of 5.8% x $50,000) is $2,100.

The floor for medical expenses isn't a new concept: it's been around since the introduction of the medical expense deduction in 1942 under President Franklin D. Roosevelt. At the time, the floor was 5% and expenses were capped. The floor was adjusted a few times and finally bumped to 7.5% under President Ronald Reagan where it remained until 2013.

The drop in the floor is curious because, notwithstanding Obamacare-repeal-related tax provisions, calls for tax reform have generally included increased limits on itemized deductions. Deductions are already limited for high-income taxpayers and recent proposals - including those from President Trump - have suggested capping itemized deductions even further. However, there's a fear that the tax credits under the GOP proposal are not big enough to offset increased health care costs, including a provision that allows insurers to charge older customers five times what they charge younger adults. Increasing the tax credits isn't a popular option among fiscal conservatives so addressing the offset by deductions is the workaround. But a change to tax credits isn't completely out of the question: under the new proposal, the Senate can tinker with the tax credits.

Again, the big consideration? Cost. Even more impactful? The increased floor might not actually offer much relief for taxpayers: while the change would allow for larger deductions for those who itemize, the reality is that most taxpayers do not itemize their deductions. Only about one-third of taxpayers itemize their deductions and in 2014, only about 6% of taxpayers claimed the medical expenses deduction (by comparison before the bump, in 2012, about 7% of taxpayers claimed the medical expenses deduction).

➤ Health Savings Account (HSA). The original GOP proposal allowed taxpayers to sock away more money into a health savings account. That remains under the revision version with one change: taxpayers would be barred from rolling any excess tax credit into an HSA.

➤ Revamping Medicaid. Changes to Medicaid, while they don't impact your tax bill, may affect your wallet. Under the revised proposal, the date for freezing the Medicaid expansion program remains through 2019. However, the new proposal would block the 19 states which don’t currently have the expansion from signing up. Those states are Alabama, Florida, Georgia, Idaho, Kansas, Maine, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Souther Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin, and Wyoming.

With Obamacare, states that had accepted Medicaid expansion received a federal match to cover those earning less than 138% of the federal poverty line (about $16,000 for a single person). The proposal would now limit the match in some states and give states more control over funding, including allowing states require adults who are not pregnant or disabled to work to receive Medicaid.

The revised plan also tackles how Medicaid payments are structured. Under the original GOP proposal, states could opt into a per capita cap system, meaning that they could receive a flat fee for each covered person. Under the revised proposal, states can opt for a lump sum payment for children and adults under 65 who don’t have disabilities which would, again, allow states more control over the funds - and some believe, easier for future federal cuts.

The changes to the proposal have won some support, mostly from conservatives in the House. Two questions remain:

  1. Will these changes be enough to pass the House?
  2. And if they are, will they also clear the Senate?

Stay tuned.


You can read my summary of the original GOP health care proposal - with links to the original language - here.

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