In the Nation's Interest

An Update on Health Care and Tax Reform

The status of what may be the Administration’s two highest legislative priorities, health care reform and tax reform, remains uncertain.

The overwhelming consensus in Washington is that the Administration and the Congress have virtually no alternative but to either complete or abandon health care reform before taking up tax reform. That is because both an Administration health care reform (to “repeal and replace” Obamacare, more formally known as the Affordable Care Act, or ACA), and any Administration tax reform, can be enacted only under reconciliation procedures in the Senate (which prevent a filibuster that would require 60 votes to break). By budget process rules, there can be only one reconciliation process in progress at one time. The current process was designed expressly for health care reform. The health care reform process cannot continue if tax reform is begun.

A decision to abandon health care reform would be extremely painful to the many Republicans in Congress who made repealing Obamacare their signature campaign promise. This would certainly be an admission of failure in the current environment, with Republicans controlling the White House and both chambers of the Congress. But that delays and reduces the time available to complete any attempted tax reform. Of course, the relevant policy players can have tax reform conversations among themselves, but that is not the same as actually engaging in a public debate over actual legislative language.

So the current debate over health care legislation is time-sensitive. And passing the House health care bill, the American Health Care Act (AHCA), was extraordinarily difficult. The Senate cannot pass the AHCA, and their passing any similar bill would likely be even more difficult than was the process in the House.

To begin, Democrats will provide zero votes to “repeal” what they hold as the signature achievement of the Obama Administration. Republicans have 52 votes in the Senate, and thus, even under the reconciliation procedure, can afford to lose only two votes. (The Vice President would be called on to break a 50-50 tie.) Thus, the Senate Republicans’ margin for error is extremely small, and the ideological spread of their membership is probably wider than is that of their caucus on the House side.

And under these daunting arithmetic constraints, the Senate health bill must thread several very small substantive needles.

The bill will be under very tight fiscal constraints. The Republicans want the health bill to reduce the deficit, so that the money it saves can be used to pay for tax reform. This is expected even after the repeal of many of the taxes and fees and some of the spending cuts that Obamacare used to finance itself.

The programmatic expectations on the bill will be considerable. Opinion surveys showed “Obamacare” to be highly unpopular. But when not identified with the bill, many of Obamacare’s key features were found to be resoundingly popular – even among Republicans, and even in the very same surveys. One such feature was eliminating discrimination against persons with pre-existing conditions. At the same time, one of the highest House Republican priorities was reducing premiums. The House Republicans could find no alternative way to reduce premiums but to water down the protections for those with pre-existing conditions, in some instances through provisions that were less than totally transparent. The Senate Republicans are likely to be less accepting of such provisions.

The House Republican AHCA sought to attract younger, healthier households to purchase insurance (without the mandate that their Members abhor) by raising the relative premiums of older enrollees. That is unlikely to sit well in the Senate – or at least well enough with a margin of only two votes.

Next on what could be a very long list of concerns is the repeal of Obamacare’s Medicaid expansion. There are 20 Republican Senators who represent states that have expanded Obamacare. As much as some Republicans opposed the Medicaid expansion, the same Senators are unwilling to impose a sudden reduction in their states’ federal funding to repeal it. Many of those Republicans also do not want to remove health care coverage from the working families who were covered by the expansion.

In the broadest terms, Republican Senators will not want to take away a benefit that has been given to the citizens of their states – even though those Senators may have on a principled basis opposed granting that benefit in the first place. But achieving everything that they want to achieve in this bill, subject to a rigorous budget constraint, may prove impossible.

And then, assuming the Senate manages to pass a bill, it will then have to reconcile its very different bill with that of the House. It is always possible that many House and Senate Republicans will decide to sacrifice their preferences to that the Administration can have its first-year victory to set a positive tone (and avoid a highly negative one). But the first instinct of a Member of Congress is almost always self-preservation, and the fondest hope and expectation is that the next election will see the triumph of his or her ideological view and thus the ability to achieve all of the goals that cannot be obtained in the present because of the service of doctrinal purity.

Whether health care reform succeeds or not, the President and the Congress are sure to find that tax reform is every bit as complex as is health care reform. Again, they will begin with the tightest budget constraint, along with a lengthy list of priorities. They already have discussed tax cuts for large businesses and small businesses, public corporations and LLCs, and of course a massive tax cut for the middle class. How all of that happens without widening the already excessive and growing budget deficit is a true puzzle. At present, the House Ways & Means Committee chair continues to maintain that he will put forward a revenue-neutral bill by relying on the so-called “border-adjustment tax” which CED has discussed in a recent policy brief, and which has proven highly unpopular in the Senate. This makes the prospects even more murky.

If all of this fails, which it may or may not, the Administration and the Congress will find themselves at the end of the year with no particular legislative achievement. There is some possibility that they would respond to that conundrum by following the path of least resistance and proposing a large net tax cut, forcing the political opposition to vote against it and thus cross many taxpayers. But that, of course, would worsen the already troubling budget outlook.