A big Republican health care fix proposed in 2005 and 2016 missing from current bill - why?

The House Republican plan to repeal and replace the Affordable Care Act (aka Obamacare) that was released on March 6 omits something that the House Republican health reform blueprint of June 2016 said would be included. The missing item is a big one, that if modified, would make the tax law more equitable, reduce health care spending, raise revenue (that could be used to help those without insurance), and help a lot of people know what their health insurance costs.

The missing change is to reduce the largest (most costly) tax benefit in the law - the exclusion for employer-provided health insurance. The House Republican blueprint for health reform stated that the annual cost is $266 billion a year (income and payroll taxes not collected due to the tax break). In June, they proposed to limit this exclusion to replace the "Cadillac" tax.

Here are observations made in the June plan on this generous tax break enjoyed by about 60% of employees (see June 2016 plan at page 15). I encourage you to read the full-text (about a page) as the Republicans lay out strong arguments why this generous tax break should be pared back.

• The tax break has no cap (as do contributions to retirement plans). It is "unlimited and uncapped, so the federal subsidy is endless."
• The CBO says the annual cost of this subsidy (meaning tax revenue that doesn't get generated due to employees being able to exclude from income what their employers pay towards their health insurance) is $266 billion per year. (Note: This is the largest tax break in the tax system by far; other large ones, such as the mortgage interest deduction and lower rate for capital gains are less than half of the figure for the exclusion.)
• "CBO has estimated that the exclusion increases average premiums for employer-based coverage 10 to 15 percent above what it would have been without the benefit because" it incentivizes employers and employees to get more expensive plans.
• The tax benefit is regressive because it provides a greater savings to individuals in higher tax brackets.
• "Our plan proposes to cap the exclusion at a level that would ensure job-based coverage continues unchanged for the vast majority of health insurance plans. Only the most generous plans would see a difference."

My observations:

• The House Republican plan released in early March does not make the above change highlighted in their "A Better Way" plan and keeps the Cadillac tax, but postpones its effective date from 2020 to 2025.  [See these House Ways and Means links to the proposal - here and here.]
• While the March 2017 plan repeals the individual and large employer mandates and the ACA taxes (including a big tax break for the top 1% and even bigger for the to 0.1%), why did it keep the employer-provided exclusion as is despite saying last June that this provision was a problem and fixing it would be better than having the Cadillac tax? [For an overview of this tax, see IRC Section 4980I and the Tax Policy Center explanation.]
• I think there are two possible reasons why the House Republicans omitted any change to the health insurance subsidy employees get when their employer pays all or part of their health insurance costs: (1) They discovered that it has become an "entitlement" so is difficult to modify; or (2) They are waiting to cut it back later either in one of the three bills they say it will take to handle ACA repeal/replace or for tax reform to generate revenue for a rate cut.
• I have not yet seen a news reporter mention this exclusion.  In fact today on an MSNBC show, a reporter and commentator stated that a goal of the Republican plan and less funding for health care was to allow market forces to handle costs.  Well, the employer-provided health care exclusion is an intrusion on market forces.  Economists estimate that it drives up health care costs by encouraging employees to get more expensive plans and it removes the supply and demand effects that should exist. A quick example of that - if you have such coverage, you know the first question a doctor asks is if you have coverage and you never hear about prices. There is an excellent discussion of this in the 2005 final report of President Bush's Advisory Panel on Federal Tax Reform (pages 78-82). That's yet one more Republican plan that called for reducing this tax break to make the law more fair and to pay for lower tax rates! (The plan called for capping the exclusion amount and allowing those without employer-provided health coverage to get a deduction for a portion of their health insurance cost.)

What do you think?

House Republican's Tax Reform Blueprint

On 6/24/16, the House Republican's released as part of their "A Better Way" vision/plan, the last of six parts. That part deals with tax reform.  The plan offers some significant changes including moving business taxation to a consumption tax model at low rates (20% for corporations and a maximum of 25% for flow-throughs).  I have a summary of the plan at "House Republicans Offer "A Better Way" for Taxes" in the AICPA Tax Insider (7/28/16).

I also learned after having this short article published that the House Republican's did some good marketing in calling their plan "a better way."  I received a few emails from readers telling me it was not a better way, as if that was my description of the plan rather than the House Republicans.  While it has some good points, whether it is "a better way" than what we have now or other plans is for discussion.  I think the plan can help us move to reform in how they talk about tax incentives - the numerous special deductions, exclusions, credits and preferential rates in the law. On page 9 of the plan, the House Republicans state:

"Many of these tax preferences, sometimes referred to as “tax expenditures,” are special-interest giveaways that are masked as tax breaks instead of direct grants. For fiscal year 2016, such “spending” through the tax code amounts to more than $1.4 trillion, or almost three-fourths of the amount of revenue raised by the entire Federal income tax. When Washington picks winners and losers with the tax code, the American people ultimately pay higher tax rates and keep less of their hard-earned money."

I think that angle to describing tax preferences is not only correct, but necessary if tax reform that involves base broadening to allow for lower rates is going to occur.  Lawmakers need to shift taxpayer thinking from these tax preferences being crucial to the system to seeing that they are what supports higher rates, inequities, lack of transparency, complexity and economic inefficiencies.

I assume that the staff of the House Ways and Means is working on legislative language for the plan. Perhaps we'll see a hearing on it after the November election.

What do you think?