Repealing Obamacare - Costs and Issues!

The 115th Congress started on January 3 and repeal of Obamacare (the Affordable Care Act) has begun.  Here is information from Majority Speaker Paul Ryan including the budget resolution to help with the repeal. He states:

“This is the first step toward relief for Americans struggling under Obamacare. This resolution sets the stage for repeal followed by a stable transition to a better health care system. Our goal is to ensure that patients will be in control of their health care and have greater access to quality, affordable coverage. Today we begin to deliver on our promise to the American people.”

The ACA is certainly not perfect and I'm speaking from a tax perspective. The ACA included some complex tax rules.  It also included some inequitable ones, which I've written about before (such as 12/14/14 and 10/18/14 and 3/8/15). Some of the key tax issues/inequities:

• If you purchase health insurance on the exchange, you only get a tax credit if your household income is under 400% of the federal poverty line (about $42,000 for a single person). In contrast, if you're fortunate to have your employer subsidize your health insurance, that income is excluded from your taxable income regardless of your income level.

• The eligibility for the Premium Tax Credit doesn't factor in age even though health insurance costs a lot more as you get older.

• The employer mandate is too complex. Reg 1.4980H-1 includes 50 definitions! and that's just part of its complexity.

The ACA enabled millions of people to afford insurance and to obtain it even if they had a pre-existing condition.

The Congressional Budget Office and Joint Committee on Taxation estimate that repeal of the ACA will increase the budget deficit by $137 billion over 10 years.

Two of the ACA taxes - the net investment income tax (NIIT) and the .09% additional Medicare tax on higher income individuals bring in more revenue than the individual AMT! That was over $35 billion for 2014. Repeal of the AMT would provide a better benefit because the AMT generally is not paid by the highest income individuals. But, where will the replacement funds come from or how much will repeal cost us in increased budget deficits and interest expense on the debt? [Per IRS data for 2014]

When will repeal be effective? Will people who purchased their insurance on the Exchange for 2017 lose it? Will they lose their subsidy (Premium Tax Credit) that helps most people be able to afford the insurance? What happens to people with pre-existing conditions? What happens to the ability for parents to include children up to age 26 on their health plan and if provided by their employer, to exclude that income benefit from income?

Challenges of repeal include:

• If there is a replacement, will it be better? 
• Why not just fix Obamacare (and call it something new)? 
• How will it all be paid for (see above dollar issues)?

Why not help pay for it by reducing the largest tax subsidy in the tax system - the income exclusion for employer-provided health care which benefits the roughly 60% of employees with such coverage?  It costs the budget about $266 billion per year! The House Republicans identify that as one of the three largest government health care subsidies. They also note that this subsidy increases the cost of health insurance by about 10 - 15% (page 15)!

Per the House Republican Health Care Blueprint (page 15):

"The non-partisan CBO projects this job-based subsidy will lower federal revenues by $266 billion in fiscal year 2016 alone and $3.6 trillion over the next decade. This benefit is so massive that, in terms of federal support, it would be the third largest health expenditure, after Medicare and Medicaid."

The Republican plan does call for taxing this benefit, likely if the benefits exceeds a specified amount. I think that's a good idea.  This is the biggest tax break in our tax system and taxing some portion of it would help fund health care for more people and even allow for lower tax rates.

We'll see what happens. Repeal won't be easy and likely won't be popular.

What do you think?

NYT questions value of mortgage interest deduction

The New York Times ran an article on 10/25/12 - "Who Really Benefits From Interest Deductions" by Lisa Prevost. It points out a few factors I have noted before in the blog (8/23/12 post and 7/3/11 post, for example). For example, since only 1/3 of filers itemized their deductions and not all itemizers have a home mortgage, less than 1/3 of homeowners benefit from the mortgage interest deduction. Also, the benefit tends to be significant, but primarily benefits those with income above $100,000. The author also refers to the mortgage interest deduction as a subsidy.

I know many object to that characterization (subsidy). They believe they are entitled to the deduction as a way to measure income. But, why?  Why that deduction and not the cost of college tuition or insurance or driving a nice car or taking care of pets?  When someone gets a deduction to lower their taxes, someone else (everyone) must pay higher taxes to allow for that lower tax bill.

Also, why have a deduction for mortgage interest when it does such a poor job of meeting its goals of encouraging home ownership?  The benefit goes primarily to higher income individuals and research shows it tends to just help them afford a more expensive home?  Also, home ownership rates in the US are similar to those of countries where there are no special tax rules?

Also, how does a deduction on mortgage interest on a vacation home help home ownership (it should be on your primary home, not your vacation home)? How does allowing interest deduction on an up to $100,000 home equity loan encourage home ownership?  It primarily encourages extra debt and is inequitable because a person without a home or without home equity who borrows, such as to buy a car, will have non-deductible personal interest expense.

The mortgage interest deduction is a $95 billion annual tax expenditure benefiting less than 1/3 of taxpayers. I think the economy would benefit by using part of that money to reduce the debt and the rest to help people purchase a home who might not otherwise be able to (people how today might not be itemizers).  The mortgage interest deduction also leads to overinvestment in housing. How might the economy benefit if some of that money went to other investments?

I realize that homeowners are not the only beneficiaries. Indirectly, the construction, real estate sales and mortgage financing industries also benefit. But that should not be reason to provide significant subsidies to high income homeowners.

Any change should be phased out with transitional relief provided to those with acquisition debt obtained in reliance on the current $1 million debt limit.

What do you think?