30 March 2017

Tax Reform in the Wake of the Collapse of the American Health Care Act

Last week the House GOP leadership pulled the American Health Care Act from the floor after not being able to get enough votes to pass the legislation. The health care replacement bill was the first item on the GOP to-do list and its failure has serious implications for tax reform for a couple of reasons.

First, the AHCA contained substantial tax cuts, such as repeal of the tax on medical devices and the end of the penalty on being uninsured. Lawmakers had been relying on those cuts to lower the budget baseline, making revenue neutral tax reform easier to attain.  Now, without those tax cuts, lawmakers will have to either (1) look to other options for raising revenue in tax reform to attain revenue neutrality, (2) slim down their tax reform plan to attain revenue neutrality, or (3) abandon their plans to make tax reform revenue neutral.

Second, one of the political fallouts of the failure of the AHCA is that the White House plans to exert more influence on policy and writing tax reform legislation. White House Press Secretary Sean Spicer said Monday that the Administration will be “driving the train on this.” But it’s not clear whether Treasury or the National Economic Council will be in the driver’s seat on that end of Pennsylvania Avenue, and whether they will be working together or competing with each other to develop the Administration’s plan. And whatever comes out of the Administration, it’s likely the Republican leaders in Congress will also push out their own plan, which they’ve spent years working on and may not want to walk away from to take up whatever the White House offers.

Third, the Republicans are politically in a weaker position than before, as various factions of the congressional majority may feel more emboldened to stand up to leadership and the White House on key provisions of whatever plan(s) eventually emerge, which along with the first two reasons would likely slow down the process of getting to a vote on tax reform.

It’s also worth noting that while the AHCA may be dead in its current incarnation, health reform of some sort is likely to be resurrected, as The Washington Post has reported. While it may take several months to get to a plan acceptable to enough congressional Republicans (or possibly even some Democrats), the possibility of using health reform to lower the budget baseline to pave the way for tax cuts could result in something happening here before tax reform is voted on.

It appears that the conversation on tax reform has moved up somewhat with the collapse of the health reform bill, but it may not have advanced the timeline for introduction of legislation or any votes on the matter – there are still plenty of obstacles to getting a bill introduced and then passed.