Senate passes tax bill that repeals individual mandate
- Early Saturday morning Senate Republicans narrowly passed their sweeping overhaul of the U.S. tax code, which includes a repeal of the Affordable Care Act’s (ACA) individual mandate and could force future automatic cuts of $25 billion a year to Medicare.
- The Senate bill could lead to a tax break for pharmaceutical companies that keep cash overseas and could affect tax cuts on R&D that were established by the Orphan Drug Act.
- Lawmakers will now attempt to work out the differences between the Senate bill and a similar tax bill the House passed last month. The House bill preserves the individual mandate and eliminates the individual medical expense deduction. However, the House could simply adopt the Senate bill, potentially muddying the waters for senators who expect further changes to the bill before it is sent to the president.
The Senate bill would implement a 12.5% tax on U.S. companies’ foreign-derived income from intellectual property, potentially aimed at encouraging drug manufacturers to register patents domestically. It would also scale back a tax credit for pharmaceutical companies conducting orphan drug clinical trials by 50%.
The bill sets up a new rate for deemed repatriation, letting companies bring cash stashed abroad back at a 14.5% rate. Under the current system they'd be taxed at the full corporate 35% rate. Last minute changes to the bill raised repatriation rates compared to the original version of the Senate bill from 10% to 14.5% for liquid assets and 5% to 7.5% for non-liquid holdings. Still, the action could be a boon for pharmaceutical companies who are thought to have large amounts of money stashed overseas.
The tax bill also puts a research and development tax credit at risk, which is often claimed by drug companies, due to the Senate’s choice to preserve the corporate alternative minimum tax. The decision could drive companies to the AMT resulting in the loss of the credit.
The Senate tax bill would repeal the ACA requirement that individuals carry health insurance or pay a penalty after Dec. 31, 2018. The provision will cause federal deficits to fall by $318 billion between 2018 and 2027 and cause 4 million to lose health insurance in 2019 and 13 million by 2027, according to the Congressional Budget Office.
The American Hospital Association (AHA) criticized lawmakers for voting to repeal the mandate, saying the action would cause millions of Americans to lose coverage. "The goal of the ACA was to extend coverage and, as a result, millions have benefited from access to needed care. We must protect that access to care for those who need it and ensure the most vulnerable patients are not left behind," AHA President Rick Pollack said in a statement.
The decision to strike the mandate could result in healthy individuals electing to leave the insurance market, which would lead to increased premiums and out-of-pocket costs for those who remain. It would also likely lead to more payers pulling out of the ACA exchange market. That, combined with the administration's earlier decision to end cost-sharing reduction payments, could lead to severe destabilization of the individual market.
But AHA praised the Senate for maintaining the tax exemption for private-activity bonds for certain non-profit hospitals. The House version of the bill would eliminate tax-exempt interest from such bonds. AHA warned that the bill’s change to repeal the exemption on interest on advance refunding bonds would damage hospitals’ ability to reduce borrowing costs.
The bill would potentially trigger automatic cuts to mandatory spending under pay-go rules, leading to billions in cuts to Medicare. But Sen. Susan Collins (R-Maine), a key swing vote, said she was convinced the cuts would not be triggered because Majority Leader Mitch McConnell (R-Ky.) and House Speaker Paul Ryan (R-Wis.) said they would ensure the pay-go law is waived if cuts are pending.
Collins was a late holdout who voted for the bill after McConnell committed to passing legislation that she says will help mitigate increases to health insurance premiums. One, the so-called Alexander-Murray bill, would provide cost-sharing reduction payments under the ACA to insurers for two years. The second would provide $5 billion annually for two years to states to establish high-risk pools or reinsurance programs.
But one expert says such efforts are inadequate. Aviva Aron-Dine, senior fellow and senior counselor at the Center on Budget and Policy Priorities, warns that temporary underfunded reinsurance programs are not enough to reverse the impact of the individual mandate’s repeal.
"As a result, it will not meaningfully reduce the risk that insurers will leave the market. Even a much larger reinsurance program would leave insurers in doubt about how to price their insurance products for the state of the overall risk pool: what they should assume, for example, about how many people will leave the market, how much healthier this group is than average, and how quickly the full effects of mandate repeal would be felt," Aron-Dine wrote.
Sen. Bob Corker (R-Tenn.) was the only Republican holdout, citing the bill’s contribution to the federal deficit as his largest concern with the bill. The Joint Committee on Taxation estimates that the bill would increase the deficit by $1,414 billion between 2018 and 2027 while increasing revenues by $458 billion.
White House Press Secretary Sarah Sanders said Saturday that the administration hopes to reach a final deal on tax reform by the end of the year.
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