Taxes

House Set to Target Deficit-Reducing Parts of ACA

Update (6/12/15): A new CBO score estimates that repealing IPAB will cost $7.1 billion over ten years, with all of the cost recorded after 2021. The text has been updated to reflect this score.

The House Ways and Means Committee today will markup several bills, including repeal of the Independent Payment Advisory Board (IPAB) and the medical device tax. You can find out more about the markup on the Ways and Means Committee website.

Unlike full ACA repeal, these policies stand a chance of overcoming a Presidential veto due to the bipartisan support already exhibited for each: as of this writing, the medical device tax repeal bill in the House (HR 160) has 281 cosponsors while the IPAB repeal bill (HR 1190) has 233 cosponsors. However, repealing these policies without offsetting savings from health care or revenue would be a mistake. IPAB, in particular, should not be abolished without a replacement that can similarly restrain long-term Medicare cost growth.

The Joint Committee on Taxation (JCT) has estimated that repealing the 2.3 percent medical device tax would cost $26.5 billion over ten years. However, JCT estimates that the amendment in the nature of a substitute that is expected to replace the bill in markup will reduce revenues by $24.4 billion over the same period.

Although the original co-sponsors of the bill, Reps. Erik Paulsen (R-MN) and Ron Kind (D-WI), said they expect the bill to be offset, no cost-savers have been produced yet. We suggested bundling payments for inpatient care as one option, which not only would produce enough savings to fully offset repeal but also achieve much of its savings from providers cutting their medical device costs. Thus, the medical device industry would still be asked to contribute to deficit reduction, but in a more efficient manner. There are many other options available as well, as we showed at the time and in our latest health care options.

Potential Offsets for Medical Device Tax Repeal
Policy Ten-Year Savings
Memo: Repeal Medical Device Tax -$24 billion
Health Options
Expand bundled payments for inpatient care $25 billion
Reduce state Medicaid provider taxes to 4.5 percent of patient revenues $35 billion
Reduce Medicare coverage of hospital "bad debts" $30 billion
Encourage use of generic drugs by low-income Part D beneficiaries $20 billion
Equalize payments for similar services performed in different settings $20 billion
Increase Medicare Advantage coding intensity adjustment $20 billion
Increase Medicaid drug rebates $10 billion
Revenue Options
Move up "Cadillac tax" by one year to 2017 $35 billion
Eliminate tax breaks for oil and gas companies $40 billion
Increase cigarette tax by 50 cents $35 billion
Close "John Edwards/Newt Gingrich" loophole $35 billion
Limit tax benefit of retirement accounts $30 billion
Eliminate tax exclusion for private activity bonds $30 billion
Require Social Security numbers for refundable portion of child tax credit $25 billion
Eliminate the mortgage interest deduction for second homes and yachts $15 billion

Source: CBO, JCT

Congressional Double-Take on Revenue

The Congressional budget resolution proposes to bring the budget into balance by reducing spending $5.3 trillion over the next decade while keeping revenue at current law levels (i.e., no tax cuts). But at the same time, it calls for roughly $2 trillion worth of tax cuts from repealing taxes in the Affordable Care Act (ACA) and extending various expired tax breaks. Some have suggested (subscription required) this $2 trillion difference could be bridged with dynamic growth effects that must now be scored by the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO). However, we find that even under very generous assumptions, the use of dynamic scoring could only recover about one-third of the lost revenue.

Source
Direct Revenue Impact Dynamic Impact (Generous) Max Percent of Revenue Recovered
Repeal ACA Tax & Coverage Provisions ~$1.3 trillion ~$0.3 trillion
~25%
Revive Extenders and Enact Tax Reform ~$0.7 trillion ~$0.4 trillion ~55%
Total Revenue Lost ~$2 trillion ~$0.7 trillion ~35%

Source: CRFB calculations based on Senate Budget Committee and Joint Committee on Taxation documents.

The $2 trillion revenue gap in the budget resolutions comes from two sources. First, the budget calls for the repeal of the tax increases enacted in the Affordable Care Act ("Obamacare") to help pay for the expansion of health insurance coverage. We estimate this would cost roughly $1.3 trillion over the next ten years, based on 2012 estimates. The budget resolution also calls for budget process reforms that would allow temporary or expired tax breaks to be continued without offsets, a move that could reduce revenue somewhere in the range of $700 billion, depending on the exact details.

At the same time, the budget calls for repealing the coverage provisions of the Affordable Care Act and enacting tax reform, two changes which could produce additional economic growth and therefore higher revenue collection. Yet this additional revenue – at least as scored by JCT and CBO – will almost certainly fall short of the $2 trillion in revenue losses.

Four Takeaways from the Solutions Initiative Plans

The Peterson Foundation's Solutions Initiative III produced five different fiscal plans that would improve the current long-term budget outlook. We have already gone over the topline numbers for the plans, but another important aspect is how they get to those numbers. Below are four takeaways from the policies that the plans propose.

Consensus on the Gas Tax

Lawmakers will have to find a way to fund the Highway Trust Fund in the next few months, and one of the possible solutions that has gained popularity with the current relatively low gas prices has been raising the gas tax. Four of the five plans - the American Action Forum (AAF) being the exception - proposed increasing the gas tax by a significant amount. The American Enterprise Institute (AEI) would increase it by 11.7 cents and index it to inflation, the Bipartisan Policy Center (BPC) would increase it by 15 cents and index it to inflation, and the Center for American Progress (CAP) and Economic Policy Institute (EPI) would increase it by an unspecified amount. AEI's and BPC's increases would fully close the trust fund shortfall through 2025. We also proposed increasing fuel taxes by 9 cents in our plan The Road to Sustainable Highway Spending.

No One Likes the Sequester

The sequester will be a big deal in the coming months when lawmakers will have to decide the level of spending for appropriations. The President's budget would repeal most of the sequester for FY 2016, while the Congressional budget would leave the sequester in place but provide backdoor sequester relief for defense through the war spending category. A notable theme in the think tanks' plans is that all of them propose some form of sequester relief, and three of them would provide sequester relief to both defense and non-defense. The only plans that left the sequester in place were AEI's for non-defense spending and EPI's for defense spending. Clearly, none of the plans were satisfied with the tight caps that the sequester prescribes, although they varied on how much to lift them (AEI stood out in particular on defense, while EPI had much, much higher non-defense caps). Although these plans do not make changes to the budget until FY 2017, their approaches can be instructive for lawmakers for FY 2016.

164 Ways to Reduce the Deficit

CRFB has released a new compendium of over 150 options to reduce mandatory spending and raise revenue. Despite declining in deficits in recent years, the debt is still projected to rise substantially over the long term. In addition, a series of upcoming Fiscal Speed Bumps will force lawmakers to make decisions about spending and revenue that could require large amounts of offsets, or potentially add almost $2 trillion to the debt.

Click here to see the full list of options.

Our list of options is meant to assist in finding fiscally responsible Speed Bump solutions, achieve some of the unspecified savings in the budget resolution, and help make the country's fiscal situation sustainable.

This paper updates and expands a health care and revenue options report released during the fiscal cliff discussions in late 2012. The new list also focuses on revenue and health care but also includes options for other mandatory (non-health, non-Social Security) spending that may be useful in the months ahead.

Let the Cadillac Tax Drive...Down Deficits and Health Care Spending

A group of House Democrats introduced a bill yesterday to repeal the tax on high-cost health insurance plans, commonly known as the "Cadillac tax," set to take effect in 2018. The repeal joins a similar House Republican bill released back in February. Needless to say, repealing the tax would be very expensive - CBO has estimated the tax raises $87 billion through 2025 while raising growing amounts over time - and likely counter-productive to health care cost control efforts. Importantly, the tax already seems to be having clear effects on the design of employer-provided health plans and has shown itself to be an important tool to slow private health spending growth (and may be playing a role in the recent slowdown). At the very least, lawmakers should plan to offset the lost revenue from repeal, but they should focus on policies that can also bend the health care cost curve.

The Cadillac tax is a 40 percent excise tax on employer-provided health insurance plan premiums that exceed $10,200 for individuals and $27,500 for families. Those thresholds are adjusted for inflation in future years so they would provide tighter limits over time since health care costs have almost always grown faster than inflation. As a result, it will raise growing amounts of revenue over time.

House and Senate Budgets Don't Balance in 2025 With Enacted Legislation

The House and Senate are going to a conference committee to reconcile the differences between their budget resolutions, but legislative developments may make reaching their goal of a balanced budget more difficult. Building off of the numbers laid out in their original budgets, neither the House nor Senate budget would get to balance by 2025 after accounting for legislation that has already passed each chamber. Budget conferees have the choice of either requiring that savings be identified to offset these new costs, or making their budgets only add up on paper, ignoring real costs that they intend to pass.

The one major bill with budgetary effects that passed both chambers is the Sustainable Growth Rate (SGR) replacement bill, now on its way to the President. Including interest, the bill increases 2015-2025 deficits by nearly $175 billion and increases 2024 and 2025 deficits by $17 billion per year. This deficit increase is enough to flip the Senate budget's $16 billion 2025 surplus to a $2 billion deficit.

The House budget did assume the cost of the SGR bill in their budget but assumed it would be paid for, so the budget would need to now find $290 billion of Medicare savings instead of the original $148 billion to stick to its numbers. Nonetheless, the SGR bill itself does not flip the budget to deficit in 2025.

However, the House has also passed $400 billion worth of tax cuts by reviving and continuing select tax extenders permanently and repealing the estate tax.

Tax Day 2015: Charts to Explain Our Tax System

In honor of tax day, CRFB and our partners at Fix the Debt released a Tax Day 2015 chartbook yesterday, with ten charts (and one table) that explain federal taxes – who pays them, what they pay for, and how they are collected.

Fundamental tax reform that simplifies the tax code, encourages growth and raises revenue could go a long way in closing the gap between spending and revenues and putting debt on a sustainable path. Click here to see the full chartbook. We've also highlighted a few of the charts below.

Ways & Means Committee Adds $270 Billion to Deficits by Repealing Estate Tax

The House Ways & Means Committee on Wednesday approved the “Death Tax Repeal Act of 2015,” which would permanently repeal the estate tax that applies to inheritances over $5.43 million. Repealing this tax would cost almost $270 billion over the next ten years, according to the Joint Committee on Taxation, or about $320 billion with interest. Since the bill does not include any offsetting revenue increases or spending cuts, the cost would be added to the national debt.

The bill repeals the estate tax on inheritances and its close cousin – the generation-skipping transfer tax.  The top rate on the gift tax, imposed on gifts of over $14,000 per person, is reduced from 40 percent to 35 percent. Since 99.8 percent of estates are worth less than the exemption amount, the $270 billion tax break would go to the wealthiest 0.2 percent of estates.

Rattner Testifies Before Senate Finance Committee on Tax Fairness

The Senate Finance Committee held a hearing Tuesday on how best to achieve "tax fairness" as a part of their larger focus on tax reform. Testifying before the committee included Steven Rattner, the chairman of Willett Advisors LLC and a current member of the steering committee for the Campaign to Fix the Debt. Rattner's testimony focused on using the tax code to address income inequality as well as the need to increase tax revenue to a level that makes the budget fiscally sustainable, principles shared by Fix the Debt's Case for Fundamental Tax Reform.

Also testifying before the committee were Dr. Lawrence Lindsey, President and CEO of the Lindsey Group; Deroy Murdock, Senior Fellow at the Atlas Network; and Dr. Heather Boushey, Executive Director of the Washington Center for Equitable Growth. Each witness came to the hearing with a different stance on how the tax code currently treats earners and how it ought to treat earners.

Rattner emphasized the tax code’s historical use as a way of alleviating income inequality. The decreasing marginal tax rate for top earners, the rampant exploitation of tax expenditures, and out-of-date corporate tax scheme all contribute to a code that fails to address adequately the changing circumstances among many Americans, according to Rattner. Despite his long career in the financial services sector, Rattner advocated increasing the capital gains tax rate, saying that he did not believe there would be any change in work ethic among his investment banking colleagues if there were a higher tax rate:

But in my 32 years on Wall Street, I have experienced top marginal Federal tax rates as high as 50% and as low as 28%, and I never detected any change in the motivation to work on the part of myself or any of my colleagues.

Business Tax Reform Chapter Lays Out Administration's Thinking

The Council of Economic Advisers released its 2015 Economic Report of the President last week, discussing several recent economic developments and how the President's policies fit into them. One chapter of particular interest given its possibility of being on the policy agenda in this Congress is on business tax reform. The chapter discusses the problems with the current system—notably, its high marginal tax rate, relatively narrow tax base, and economically distorting incentives—and how the President's approach would help the economy, productivity, and living standards.

For background, the Administration's policy on business tax reform can be summarized between the specific policies laid out in the budget, with additional detail in its business tax framework. The budget calls for the corporate tax rate to be reduced from 35 to 28 percent and extensions/expansions of some existing tax breaks, like a permanent extension of the R&E credit and new or extended tax breaks for clean energy. The budget also contains a number of revenue-raisers that would pay for them, including a 19 percent minimum tax for income earned abroad, the elimination of tax incentives for fossil fuel producers, and the changing of inventory accounting rules.

The revenue-raisers would pay for the tax breaks but would leave only $140 billion of revenue to pay for the rate cut, only about one-fifth that is needed. However, the framework states that additional revenue could come from addressing depreciation schedules and limiting the deductibility of interest. Finally, the budget dedicates revenue to the Highway Trust Fund from a 14 percent temporary tax on earnings held abroad by U.S. companies.

Components of President Obama's Business Tax Reform Plan
Policy Savings/Cost (-) Through 2025
Reform the international tax system $238 billion
Change inventory accounting rules $84 billion
Eliminate fossil fuel tax preferences $50 billion
Reform financial and insurance industry tax treatment $34 billion
Enact other revenue raisers $40 billion
Extend and expand R&E credit -$128 billion
Enact/extend small business tax cuts -$94 billion
Enact/extend manufacturing and clean energy incentives -$58 billion
Enact infrastructure and regional growth tax cuts -$26 billion
Total, Business Tax Reform Reserve $141 billion
Make unspecified changes to depreciation and interest deductions ~ $560 billion*
Cut corporate rate from 35% to 28% ~ -$700 billion
   
Implement 14% transition tax on earnings held abroad $268 billion
Dedicate revenue to Highway Trust Fund -$238 billion

Source: OMB, CBO, CRFB calculations
*Numbers represents roughly the additional revenue needed to finance the rate cut. Actual revenue may be larger since depreciation changes raise less in the long term than the short term

The chapter includes four interesting discussions of elements of business tax reform:

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