By Ryan Ellis
Where’s Jack Kemp when you need him? Heck, for that matter where is Bill Roth or Phil Gramm?
The biggest tax cut the U.S. House of Representatives is likely to pass this calendar year is, ironically, the American Health Care Act (i.e., AHCA or Obamacare repeal). According to the Congressional Budget Office, it’s a ten year tax cut of $1 trillion. Eventually, all twenty or so new or higher taxes in Obamacare are repealed by the bill–most of them retroactive to the beginning of this year. These include:
- Zeroing out the taxes associated with the individual and employer mandates
- Eliminating the “net investment income tax” (NIIT) that effectively increases the capital gains and dividends rate by nearly four points
- Striking out a hike in the Medicare payroll tax, but more on this below
- Doing away with a host of tax increases on health savings accounts and flexible spending accounts, the “medicine cabinet tax,” the “catastrophic medical bills” tax, and many others
- Rolling back taxes on medical devices, pharmaceuticals, and health insurance plans that make them more expensive
- Ending the “Cadillac plan tax” on high cost health insurance
Yet a last minute change to the AHCA has an unfortunate effect on taxpayers in general and small business owners in particular. It should be corrected as part of Senate deliberation on Obamacare repeal. A pro-growth, pro-taxpayer, supply side Republican Senate should have no problem doing so.
As you might recall, the refundable tax credit for the purchase of post-Obamacare individual market health insurance has come under some criticism. Avik Roy of these pages has a detailed plan to make the credits work in a more coordinated way with Medicaid reform so that the benefit flows to those who need it most. The Senate will no doubt take his idea under serious advisement (Senator John Thune of South Dakota is said to be the lead).
To signal to moderates and others that improving the credit was a bicameral concern, the House late in the drafting process (in a manager’s amendment) put in a “fiscal placeholder,” essentially a bank for the Senate to use to plus up the credit for near retirees, the working poor, etc.
This “fiscal placeholder” was paid for in the AHCA by delaying repeal of one of the twenty new or higher taxes in Obamacare. Namely, the manager’s amendment pushes off the repeal of Obamacare’s Medicare payroll tax hike until 2023.
How does that Obamacare tax hike work?
Before Obamacare, the Medicare payroll tax was a very straightforward flat tax. Every single dollar of wages and self-employment profit was subject to it at a flat rate of 2.9 percent. For workers, this was notionally split between employer and employee. For the self-employed (that is, small business owners), they are stuck paying the whole thing (though they can deduct half of it against their taxable income).
Obamacare created a second tax bracket of 3.8 percent on all wages and self-employment profits exceeding $200,000 ($250,000 in the case of a married filing jointly taxpayer). These thresholds are not indexed to inflation or anything else, so over time this tax hike would apply to more and more families, like a lobster being boiled one degree at a time so he doesn’t notice.
Like the rest of the tax hike repeals, this Medicare payroll tax hike was originally set to be rolled back as of January 1, 2017. Small business owners could thus expect tax relief right away, as their marginal tax rate declined a percentage point or so as a down payment on tax reform. Ditto for families with children, who tend to be in their peak earnings years.
The manager’s amendment’s fiscal placeholder, however, delayed repeal of the tax for six years, until 2023. The Senate should restore this tax relief so that it is repealed on the same schedule as the other taxes, namely this year.
All the chatter has been in the other direction. Senator Bill Cassidy (R-La.)has even suggested delaying repeal of even more Obamacare tax hikes so that the government can spend more than the House AHCA on Medicaid and the refundable aspects of the individual credits. He has proposed no spending cuts to achieve these changes, it should be noted–only tax increases. He has lamented that cutting taxes in Obamacare makes tax reform easier, as if that’s a bad thing.
The late Bob Novak wisely once said that Republicans were put on this earth by almighty God for one and only one purpose–to cut taxes. Trying to find ways NOT to cut taxes in order to increase government spending is crazy. My first job out of college was working as a junior policy aide to Jack Kemp, and I know he would agree. He would not want to outsource Republican fiscal policy to Jimmy Kimmel.
Senate Republicans have an obligation to their base to fully repeal the Obamacare taxes, as quickly as possible. It would be political malpractice not to do so.
Read more here.