Promises made, questions left unanswered by GOP tax plan

The Trump administration and Congressional Republican leaderships this week released their “Unified Framework for Fixing our Broken Tax Cod,” a nine-page manifesto birthed from months of closed-door meetings on tax reform by the so-called Big Six: Treasury Secretary Steve Mnuchin, National Economic Council Director Gary Cohn, House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, House Ways and Means Committee Chairman Kevin Brady, and Senate Finance Committee Chairman Orrin Hatch.

The goal of the framework is to move the tax reform process forward, in particular to build support for a budget resolution that will permit the House and Senate to pass tax reform legislation by a simple majority vote.

With that goal in mind, the framework answers several important questions regarding tax reform, but it leaves far more either unanswered or with too brief or too vague of a description to evaluate.  Because it is an advocacy piece, the framework is light on details.  And, when it has details, they generally focus on the good news (i.e., taxpayer-favorable provisions that are being added or expanded) rather than the bad news (i.e., provisions being eliminated or reduced).   Further, in many cases, the framework uses guarded language or caveats when discussing politically sensitive areas.  For example, the framework “aims” to consolidate the tax rates for individuals, “envisions” changing inflation adjustments and repealing provisions to make the tax code simpler, and “contemplates” preventing wealthy individuals from avoiding the top personal tax rate.  Areas that are still unsettled or where further work is required are left to the Ways and Means Committee and Finance Committee (the “committees”) to work through and resolve.

What the Framework Says

Rates

Individuals

The framework “aims” to consolidate the current seven tax brackets into three brackets of 12%, 25% and 35%, although it warns ominously that “an additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.” The framework also calls for use of a more accurate (i.e., less taxpayer-favorable) measure of inflation for purposes of indexing the tax brackets and other tax parameters.

Businesses

For corporations, the framework would reduce the top tax rate to 20%. It notes that “the committees also may consider methods to reduce the double taxation of corporate earnings,” leaving open the possibility of a corporate integration proposal.

For pass-through entities, the framework would “limit the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25%.” Nonetheless, the framework “contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate. ”

Deductions, Exclusions and Exemptions

Individuals

The framework would:

  • combine the existing standard deduction and the personal exemptions for taxpayer and spouse and increase it to $24,000 for married taxpayers filing jointly and $12,000 for single filers;
  • convert existing personal exemptions for dependents into an enhanced child tax credit or a non-refundable $500 credit for non-child dependents;
  • eliminate “most” itemized deductions, but “retain tax incentives for home mortgage interest and charitable contributions, and
  • retain “tax benefits that encourage work, higher education and retirement security,” although the committees are encouraged to simplify them “to improve their efficiency and effectiveness.”

Punted to the committees:

  • “work on additional measures to meaningfully reduce the tax burden on the middle-class;”
  • repeal of many of the “numerous” exemptions, deductions and credits for individuals that “riddle the tax code” in order to “make the system simpler and fairer;” and
  • the appropriate treatment of interest paid by non-corporate taxpayers.

Businesses

The framework:

  • would provide immediate expensing, for at least a five-year period, for all depreciable assets– other than structures–acquired after September 27, 2017.
  • states that the deduction for net interest expense incurred by C corporations will be partially limited.
  • specifically calls for the repeal of the section 199 manufacturing deduction, and states that “numerous other special exclusions and deductions will be repealed or restricted.” There are two explicit exceptions–the R&D tax credit and the low-income housing tax credit–although “the committees may decide to retain some other business credits to the extent budgetary limitations allow.”
  • would “modernize” the tax rules affecting specific industries “to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.”

Repealed

The framework would repeal:

  • The individual alternative minimum tax (“AMT”);
  • the corporate AMT (or at least “aim to”); and
  • the estate tax and generation-skipping transfer tax.

International Tax Reform

The framework:

  • Calls for adoption of a new “territorial” tax system with a 100% exemption for dividends from foreign companies in which the US parent owns 10% or more of the shares. However, this dividend exemption comes at price: “to prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.”
  • Would impose a “deemed repatriation” tax on US multinationals with offshore earnings. Different rates would apply to earnings held in liquid and illiquid form, although neither the rates nor the period over which the payments must be made is specified.
  • States that the committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies.

What the Framework Doesn’t Address

  • Effective dates (other than for expensing)
  • Phase-ins and transition rules
  • How the international tax rules would apply to individuals
  • How it plans to comply with the budget rules

Next Steps

The House and Senate have to agree on a budget resolution that provides for a tax reform package in line with the framework. Once that is agreed to, the Ways and Means Committee and Finance Committee can proceed to marking up tax reform legislation and filling in the blanks.

Border Adjustment Dropped from GOP Tax Plan

Bowing to the demands of major retailers, whose claims were buoyed by conservative activists like import-reliant Koch brothers, the White House and Republican Congressional leadership officially confirmed late last week in a joint statement what had long been rumored: a border adjustment tax will not be used as a pay-for in the tax reform program Republicans hope to pursue this fall.

In the joint statement, the so-called “Big 6” (Speaker Paul Ryan (R-WI), Chairman Kevin Brady (R-TX), Finance Committee Chairman Orrin Hatch (R-UT), Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn) stated: “While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.” In an interview yesterday, Chairman Brady said that he still thinks border adjustment is the best solution for keeping jobs in America, but that “… in order for us unify, it was important to set it aside for now.”

As the border adjustment tax proposal was estimated to raise between $1 trillion and $1.2 trillion in revenue that could be used to lower tax rates, law makers will have to identify alternative revenue sources if they wish to lower tax rates without increasing the deficit. Apart from abandoning a border adjustment tax, the joint statement did not address such key issues as the level at which tax rates should be set, whether businesses would continue to be able to deduct their interest expenses and how best to incentivize US companies from moving their operations overseas. Instead, the joint statement simply pledged Republican support for the principles of reducing rates, simplifying the tax code and using the tax system to improve economic growth.

The joint statement reveals that the parties’ expectation is for ” … legislation to move through the committees this fall, followed by consideration on the House and Senate floors.” While the joint statement authors express the hope that Congressional Democrats will join them in this effort, and suggest some openness to pursuing tax reform on a bipartisan basis unlike the just-failed Republican effort to repeal Obamacare, it should be noted that Republicans once again plan to use the reconciliation process in their pursuit of tax reform – a process that can have the effect of reducing the need for bipartisan cooperation. Moreover, given the very contentious course of dealing in recent years in the Ways & Means Committee and the Finance Committee, it does not yet seem that a foundation has been laid for bipartisan cooperation on tax reform issues.

Washington’s week ahead: July 17

In the latest of a string of setbacks, ObamaCare reconciliation vote delayed in the Senate as Arizona Senator John McCain is treated for a blood clot… Don Jr., and others, met with Russian promising “very high level and sensitive information”… Approps Omnibus package gains steam – pre whip count – in House… POTUS celebrates Bastille Day in Paris with French President Macron… Federal Judge in Hawaii loosens Trump temporary travel ban… CBO says Trump ’18 budget will not balance in a decade, contrary to WH estimates… FBI nominee Wray testifies before Senate Judiciary Committee… House Appropriations Committee releases spending bill with $1.6 bill for border wall… Former FBI Director Comey signs book deal… POTUS approval rating after six months in office is the lowest of any president in the past 70 years, according to a new poll… And K Street scrambles to rebook flights out of town as Leader McConnell takes back 2 weeks of recess…

THE WEEK AHEAD:   The White House dubs this “Make in America Week”… CBO score due for repeal 2.0..House Budget Committee to mark up… House whips Approps Omni package…

POTUS:   POTUS  announced the appointment of Ty Cobb–no not that one: a veteran Washington lawyer with experience as a federal prosecutor and defense attorney–as special counsel at the White House

CONGRESS:  The House Dress Code gets an update. The conservative firebrand credited with pressuring then-Speaker John Boehner (R-Ohio) to resign in 2015 issued a warning Thursday to Senate Majority Leader Mitch McConnell (R-Ky.) and his establishment allies.. Rep. Brad Sherman (D-Calif.) formally introduced an article of impeachment against President Trump on Wednesday.

THE COURT:   Partisan map makers beware, the Supreme Court is set to take a serious look at partisan gerrymandering with a case that could jeopardize voter maps across the country and help Democrats regain control of Congress

APPROPRIATIONS:  House GOP leaders will return to Washington this week with hopes of passing a budget resolution and a 12-bill omnibus before leaving town for the August recess.

CYBER:  Major technology companies and tech advocacy organizations are banding together in a last-ditch effort to save the Federal Communication Commission’s net neutrality rules.

ENERGY:  House appropriators diverged from President Donald Trump’s budget proposal by minimizing cuts to the Interior Department and the EPA’s budget as part of the energy and water appropriations bill.

ENVIRONMENT:  The Environmental Protection Agency asked for a 52-day delay from having to enforce the Obama-era regulation for the venting and flaring of methane, a critical greenhouse gas, after a court ruled against the agency. The U.S. Court of Appeals for the District of Columbia Circuit granted a 14-day stay while the EPA considers further legal action.. A bipartisan group on the House side protected the need to study climate change as part of national security as part of the National Defense Authorization Act, striking down an amendment that opposed it.

HEALTH:  It’s unclear whether Senate Republicans have the votes to win on a key procedural motion that would allow them to debate the new healthcare bill they released on Thursday.  Here is what has changed in the new version and a look at who got what. 

RUSSIA INVESTIGATION: Trumpland lawyers up… Calls for Kushner to loser his security clearance have mounted, as congressional investigators probe whether the Trump campaign’s digital operation — run by the president’s son-in-law — coordinated efforts with Russian bots spreading fake news about Hillary Clinton.  The Federal Election Commission (FEC) is sharply divided over how the election watchdog agency should respond to Russian interference in the U.S. election as more revelations come to light about foreign meddling during 2016.

RUSSIAN SANCTIONS:  Lawmakers are growing increasingly frustrated with a series of procedural spats that are stalling new Russia sanctions in the House amid mounting concerns about Moscow’s election meddling.

TRADE:  Energy Department Secretary Rick Perry visited his counterpart in the Mexican government to discuss trade relations and cross-border electricity transmission as part of a broader discussion on North American energy strategy.

TRAVEL BAN: The Trump administration asked the Supreme Court on Friday to block a federal judge’s ruling that grandparents of U.S. citizens and refugees already being processed for resettlement are exempt from President Trump’s travel ban. 

CONFIRMATION UPDATE: Office for Regulatory Affairs  PREVIOUSLY CONFIRMED- FEMA Administrator  Deputy Secretary of State, Associate Attorney General, Deputy Secretary of Transportation,  Sec. of Air Force, FDA Commissioner, US Trade Representative Chairman of the SEC,  Sec of Agriculture, Sec of Labor   Associate Justice of the Supreme Court , Amb. To Israel  Admin of CMS, Director of National Intelligence, Sec. of HUD, Sec. of Energy, Sec of Interior,  Sec. of Treasury, OMB Director,  Attorney General, Sec. of Education, Sec of Veteran’s Affairs , EPA Administrator, Small Business Admin, Sec. of HHS, Sec. of State, Sec of Transportation, Director of CIA, Sec. of Defense, Amb. to the UN, Sec. of Homeland,  Sec. of Commerce  

PRESIDENTIAL MEMORANDUM & EXECUTIVE ORDER TRACKER:   Presidential Memoranda Cuba  Jerusalem Embassy Act  Stabilization of Iraq  Aluminum Imports    Offshore Drilling, VA Accountability, Local Control of Education, Review of Antiquities Act, Rural American Prosperity : Orderly Liquidation Authority, Financial Stability Oversight Council, Steel Imports and Threats to National Security  Executive Branch Re-Org    Travel Ban 2.0 Memo for USSS, USAG, USSHS     Fiduciary Duty RuleNational Security Council,  Defeat ISIL,   Pipeline Construction, American Pipe,  Domestic Manufacturing,  TPP, Hiring Freeze, Mexico City (Abortion), Memo to Executive Departments and Agencies  Executive Orders: North Korea   Western Balkans Cyber security    Election Integrity   Promoting Free Speech & Religious Liberty Identifying Tax Burdens, Buy American and Hire American  Principles for Reforming the Military selective Service Process  Climate,   Addiction & Opioid Crisis , Report on Trade Deficits,  Trade Enforcement Travel Ban 2.0  Regulatory Reform Task Forces,  Crime Reduction, Drug Cartels, Law Enforcement protection, DOJ Succession,  Dodd Frank,  2 for 1 Reg,    Border and Immigration Enforcement, ObamaCare, Public Safety, Expediting Environmental Review Process, Visa Restrictions

 

Where McConnell’s latest attempt to pass a health care bill stands

Senate Majority Leader Mitch McConnell’s latest attempt to pass the GOP’s health care agenda was revived this week with the release of an updated bill.

However, two Republican senators, Susan Collins of Maine and Rand Paul of Kentucky, quickly have said they would not support a procedural vote early next week that would bring the latest health care proposal to the floor. With no more votes to spare, leadership enters the weekend focused on their whip operation.

Here’s a summary of the latest round of horse trading as illustrated in the newest version of the bill:

  • CassidyMedicaid base year: latest draft allows late expansion states to only use four quarters of data for their per capita base year and not eight. Important for Louisiana.
  • MurkowskiEnhanced FMAP: latest draft includes an enhanced 100% FMAP for eligible individuals who are members of an ‘Indian tribe’, which will be helpful in multiple states, but is written to also include individuals in Alaska.
  • RubioPublic health expenditures: latest draft exempts public health expenditures from both the Medicaid per capita caps and block grant funding. A priority for Sen. Rubio considering Florida’s experience with the Zika outbreak.
  • Portman/ CapitoOpioid Funding: latest draft includes an additional $45 billion for the opioid crisis, specifically for state grants for treatment and recovery programs as well as research money into pain and addiction with respect to the crisis.
  • Corker/ Thune and several GOP SenatorsIncrease affordability: latest draft includes additional $70 billion to the Long Term Stability fund to help individuals purchase health coverage at a lower price.
  • Moderate GOPKeep some ACA taxes: Latest draft maintains two ACA taxes against high income Americans (Medicare tax on high earners and net investment tax).
  • ConservativesMarket reform: latest draft allows HSA funds to pay for insurance premiums, allow catastrophic plans to be sold on exchanges and allows subsidies to be used to buy them; Medicaid: latest draft maintains Toomey’s slower per capita cap growth rate than in house-passed bill; Cruz proposal: latest draft includes bracketed language that would allow insurers that sell ACA compliant plans (at least one gold and silver) to also offer plans off the exchange that would be exempt from several ACA insurance requirements (including pre-existing conditions, community rating and guaranteed issue) but would allow federal subsidies to be used to purchase them.

Is it enough?

  • Sens. Rand Paul and Susan Collins reiterated their opposition almost immediately after the new draft was released; therefore GOP leadership cannot afford another no vote.
  • First vote will be a procedural vote– on the motion to proceed– that is a procedural vote to start debating the House-passed bill. GOP leadership has been working with Senators emphasizing the need for a Republican-led Senate to be able to vote to get on an Obamacare repeal bill so they can start debating the contents of the legislation.

What will the Parliamentarian say?

  • This week started the official litigation with the Senate Parliamentarian where majority and minority staff are both present to argue their case as to whether provisions of the draft legislation violate the Byrd rule. The process was focused on provisions in the first CBO score and this week focused on Medicaid provisions, tax provisions and the insurance provisions in Title II of the draft.
  • What the parliamentarian said this week about the insurance provisions, the Sec. 1332 waiver changes, etc will have an impact of the politics of the bill. Will the parliamentarian strike any of the provisions that the conservatives point to as repealing parts of the Obamacare.
  • These official litigations will continue next week to include the new provisions in the latest draft, including the Cruz proposal, next week.

What will the CBO say?

  • A new CBO score is due out early next week, as early as Monday. Originally, reports suggested CBO would have two scores, one with the Cruz proposal and one without. However, since the CBO didn’t receive legislative language until too late on the Cruz proposal, it is likely the CBO will not have the time to score that part of the newly released draft.
  • Leaving GOP Leadership of having to find another official body to do the analysis of the Cruz proposal, possibly OMB or CMS.

Compare latest version of Senate GOP health bill to first attempt

Below is a summary of the discussion draft released yesterday by Senate Majority Leader Mitch McConnell with those comments in PURPLE denoting changes that were made to the prior version.

Medicaid

The Senate bill ends the ACA Medicaid expansion and starts a three-year transition period for expansion states, commencing on January 1, 2020. Expansion states are limited to those that implemented the Medicaid expansion by March 1, 2017. The three-year transition period would see the enhanced federal match for those states reduced in stages as follows:

  • 2020 — 90 percent federal match
  • 2021 — 85 percent federal match
  • 2022 — 80 percent federal match
  • 2023 — 75 percent federal match
  • 2024 (and subsequent years) — standard state matching rate

No changes to policy in latest draft.

Eligibility redeterminations:  Like the House bill, the Senate bill requires states, starting on October 1, 2017, to redetermine Medicaid eligibility every six months (or more often, if the state chooses). It also provides for a five percent enhanced federal match to help states implement this. No changes to policy in latest draft.

Optional work requirement:  The Senate bill allows states, beginning in FY 2018, to include in their Medicaid program an optional work requirement for non-disabled, non-elderly, non-pregnant individuals. There is an increased match available for implementation activities. No changes to policy in latest draft.

Medicaid and CHIP quality performance bonus payments:  The Senate bill provides for $8 billion in performance-based payments for states that report on and meet quality indicators and whose spending is below benchmarks. No changes to policy in latest draft.

Retroactive eligibility: The Senate bill reduces retroactive eligibility from 90 days to the month in which the applicant applied. The latest draft provides an exception to the reduction in retroactive eligibility for blind and disabled.

Presumptive eligibility: The Senate bill eliminates presumptive eligibility. No substantial changes to policy in latest draft.

Home and Community-Based Services demo (brand new): The latest draft of the Senate bill establishes an $8 billion, 100 percent Federal Medical Assistance Percentage (FMAP) demonstration project for 2020 through 2023 for states to provide home and community-based services payment adjustments. Priority is given to the 15 least densely populated states.

Per capita caps

The Senate bill starts the transition from the current Medicaid program to per capita caps (PCCs) in FY 2020. No changes to policy in latest draft.

Baseline:  Instead of using FY 2016 as the base year (as in the House bill), the Senate version allows the states to choose any eight consecutive fiscal quarters within the period of 2014 through 2017 to calculate an average base year. HHS may adjust the base year if it determines the state has taken actions (e.g., through supplemental payment data retroactive adjustments) to “diminish the quality of the data” used in calculating the PCCs. There are also certain exclusions from the baseline period, such as disproportionate share hospital (DSH) payment adjustments, Medicare cost-sharing, and non-expansion state provider payment adjustments. Newest draft includes a change for late expansion states that allows them to pick only four fiscal quarters instead of eight. This was a concern raised by Sen. Cassidy (R-La.) on behalf of his state.  Latest draft also excludes from the PCCs up to $5 billion in spending for public health emergencies between 2020 and 2024. This was a priority for Sen. Rubio (R-Fla.), whose state has recently been impacted by Zika outbreak.

Growth rate:  From 2020 to 2024, the Senate bases their growth rate on the medical component of the consumer price index (CPI). Starting in 2025, the growth rate will be based on the CPI for all urban consumers (CPI-U). No changes to policy in latest draft.

PCC target adjustments:  States whose expenditure targets exceed the mean by at least 25 percent will be reduced by an HHS-determined amount of between 0.5 percent and 2.0 percent. If less than the mean per-capita expenditure for all states (but not by less than 25 percent), states will receive a corresponding HHS-determined increase. Federal payments must be budget neutral. The provision does not apply to “low population density” states. No changes to policy in latest draft.

Excluded populations:  The Senate bill lists the following populations as excluded from PCCs: CHIP beneficiaries, Indian Health Service, breast and cervical cancer services-eligible enrollees, specified partial-benefit enrollees, and medically complex children. No changes to policy in latest draft.

Essential health benefits (EHBs):  Like the House-passed bill, the Senate bill sunsets Medicaid EHBs after Dec. 31, 2019. No changes to policy in latest draft.

Block grant option

Medicaid Flexibility Program:  The Senate bill, like the House bill, provides states the option beginning in FY 2020 to choose the “Medicaid Flexibility Program” instead of PCCs. The Senate bill imposes certain requirements on the states with respect to the application process, including a requirement to publish the application in the state along with at least a 30-day state notice and comment period. The Senate bill also includes required benefits and services, applies mental health and substance abuse parity and applies Medicaid rebates if outpatient drugs are covered. Premiums, deductibles and cost-sharing are permitted as long as they do not exceed 5 percent of family income. The latest draft expands the populations that states may include in the Medicaid Flexibility Program from the “other nonelderly, nondisabled, nonexpansion adult category” to also include the expansion category. Additional funds may be provided if there is a public health emergency, again a priority for Sen. Rubio.

Provisions for non-expansion states

Removes DSH cuts for non-expansion states:  The bill would remove ACA-implemented DSH allotment cuts for all non-expansion states. In addition, non-expansion states whose DSH allotments were below the national average in FY 2016 would receive an increase in their FY 2020 DSH allotment by the amount it would take to meet the FY 2016 national average. This one-time increase would not impact future calculations. The removal of DSH cuts would not apply to expansion states, whose ACA DSH cuts would stay in place. Latest draft includes a slight change in the methodology that would be used to determine states whose DSH allotments were below the national average. Latest draft clarifies that for the purpose of this provision, a non-expansion state is a state that does not cover expansion populations as of January 1, 2021 (rather than date of enactment).

Additional safety net funding for non-expansion states:  The Senate bill allows non-expansion states to provide additional “safety net” provider payments “so long as the payment adjustment to such an eligible provider does not exceed the provider’s costs in furnishing health care services” and also provides an increase in FMAP for such adjustments: 100 percent in FY 2018 through 2021 and 95 percent in FY 2022. No changes to policy in latest draft.

Other Medicaid-related provisions

Support for state response to opioid crisis:  The bill would appropriate to HHS $2 billion for FY 2018 “to provide grants to States to support substance use disorder treatment and recovery support services for individuals with mental or substance use disorders.” Latest draft boosts opioid-response funding by $45 billion to provide states grant money for treatment and recovery support services as well as research funds on addiction and pain as they relate to opioids.

Medicaid provider taxes:  Starting in FY 2021 and continuing over the next four years, the bill gradually reduces the threshold allowed for provider taxes from 6 percent in current law to 5 percent by 2025. No changes to policy in latest draft.

Planned Parenthood:  The Senate bill includes the House-passed policy defunding Planned Parenthood for one year in the Medicaid program. Also like the House-passed health bill, the Senate bill provides an additional $422 million for community health centers for one year. No changes to policy in latest draft.

Changes to the Affordable Care Act

Repeals the individual and employer mandates:  Like the House-passed health bill, the Senate bill also retroactively repeals both the individual and employer mandates, effective back to 2016. No changes to policy in latest draft.

Subsidies/tax credits

ACA subsidies:  The Senate bill continues through 2019 ACA subsidies as currently structured. Beyond 2019, the Senate bill modifies the eligibility of subsidies down from 400 percent Federal Poverty Level (FPL) to 350 percent FPL, and extends them down to 0 percent FPL from 100 percent FPL in the ACA. Also, the amount of the subsidy is based on income, age and geography, and is tied to a maximum percentage of income an individual can spend on the cost of his or her premium. No changes to policy in latest draft.

Definition of “lawful presence”:  The Senate bill makes modifications to the definition of lawful presence, such as replacing it with “qualified alien.” No changes to policy in latest draft.

Benchmark plan:  Instead of using the ACA’s second-lowest-cost silver plan as the benchmark for premium subsidies, the Senate bill defines the benchmark plan as median premium that has 58 percent actuarial value. Latest draft allows premium subsidies to be used to purchase catastrophic plans.

Small Business Tax Credit:  The Senate bill ends the small business tax credit, starting in 2020. For plans with abortion coverage, the credit ends starting in 2018. No changes to policy in latest draft.

Cost-Sharing Reduction (CSRs) Subsidies:  The Senate bill appropriates cost-sharing reduction subsidy payments for two years (through plan year 2019) and then repeals the cost-sharing subsidy program after Dec. 31, 2019. No changes to policy in latest draft.

Insurance market changes

Age rating:  Like the House bill, the Senate legislation changes age rating bands to 5:1 and would take effect for plan years beginning on or after Jan. 1, 2019. States are given the flexibility to set their own age rating bands. No changes to policy in latest draft.

MLRs:  The Senate bill sunsets the ACA’s medical loss ratio for plan years beginning on or after Jan. 1, 2019, allowing states to set their own MLR thereafter. Latest draft maintains the sunset of the MLR in 2019, and then requires states to set their own MLRs for group and individual coverage.

QHP definition:  The Senate bill specifically excludes from the definition of a “qualified health plan” (QHP) any plans that cover abortion (except for abortions “necessary to save the life of the mother” or undertaken to end “a pregnancy that is the result of an act of rape or incest”) as of Dec. 31, 2017.

1332 waivers:  The Senate makes changes to the ACA’s 1332 waiver process by allowing states to waive a variety of ACA requirements, including essential health benefits and regulations prohibiting subsidies off-Exchange. The Senate bill also removes the requirement that 1332 waivers must be budget neutral or achieve the same coverage rates as would otherwise be attained under federal law and instead requires that the waiver must not add to the federal deficit. HHS may also establish an expedited waiver approval process, if the waiver responds to “an emergency situation with respect to health insurance coverage” in the state. The Senate bill encourages states to apply by making available $2 billion in grant funding through 2019 for the application process. Latest draft adds to the description of the alternative means that a state’s application can use to meet the 1332 requirements to include “providing consumers the freedom to purchase the health insurance of their choice and increasing enrollment in private health insurance.” Latest draft also adds that the Secretary must approve the waiver unless the waiver adds to the federal deficit or is missing a required element of 1332 waivers. It also adds to the pass-through funding language those who would qualify for a reduction in the premium tax credits.

Small business health plans:  The Senate bill adds a section to include group health plans sponsored by trade associations within the definition of “small business health plan.” It establishes requirements for plan certification, sponsors, board governance and plan oversight, and includes a provision that preempts states laws that preclude issuers from offering trade association-sponsored plans. Latest draft makes changes to this section that would increase oversight of small business health plans, including certification requirements of both the plan and plan sponsors.

ACA Taxes

Cadillac tax:  Like the House bill, the Senate bill delays the Cadillac tax until 2025. No changes to policy in latest draft.

Medical device tax: Like the House-passed bill, the Senate bill repeals the 2.3 percent excise tax on medical devices. But it does so beginning in 2018, one year later than the House version. No changes to policy in latest draft.

Health insurance tax:  The Senate bill repeals the health insurance tax beginning in CY 2017. No changes to policy in latest draft.

Medicare tax:  The House-passed health bill repealed, effective January 1, 2023, the ACA’s 0.9 percent Medicare surtax on high-income earners. The prior draft of the Senate bill did as well, but the current version has removed this section, leaving the ACA Medicare surtax in place.

Net investment tax:  The prior draft of the Senate bill, like the House-passed bill, repealed the 3.8 percent net investment tax; retroactively effective January 1, 2017. The latest draft has removed this section, leaving the ACA Net Investment tax in place.

Tax on OTC medications:  The Senate bill, like the House-passed health bill, repeals the prohibition of paying for over-the-counter medicines with health savings accounts; retroactively effective January 1, 2017. No changes to policy in latest draft.

Tax on prescription medications:  The Senate bill repeals this tax effective in 2018, one year later than the effective date in the House-passed health bill. No changes to policy in latest draft.

Medicare Part D deduction:  The Senate bill repeals the ACA’s elimination of employers’ deduction for retiree drug costs; retroactively effective January 1, 2017. No changes to policy in latest draft.

Medical deduction tax:  Also known as the “chronic care tax,” it is repealed in the Senate bill retroactively effective January 1, 2017, and the medical deduction threshold is restored to its pre-ACA level of 7.5 percent. No changes to policy in latest draft.

Tanning tax:  The Senate bill repeals the ACA tanning tax effective Sept. 30, 2017. No changes to policy in latest draft.

Health savings accounts (HSAs):  The Senate bill lowers the additional tax on distributions not used for qualified medical expenses from HSAs from 20 percent increase in the ACA to a 10 percent increase, and for Archer medical savings accounts from 20 percent down to 15 percent; allows spouses each enrolled in a high-deductible health plan (HDHP) to make catch-up contributions to the same HAS; and increases maximum contributions to HSAs to the amount of the deductible and out-of-pocket limitation. The latest draft adds a provision that would allow HAS funds to be used to pay the premium of the HDHP.

Stabilization Fund

Short-term stability:  The bill would appropriate $15 billion for CY 2018 and 2019; and $10 billion for years 2020 and 2021 for CMS to fund arrangements with “health insurance issuers to assist in the purchase of health benefits coverage by addressing address coverage and access disruption and responding to urgent health care needs within States.” Funds remain available until spent. Latest draft amends purpose for funds in the short-term stability fund as noted above in red.

Long-term stability and innovation program:  The bill appropriates a total of $62 billion from CY 2019 to 2026, including $8 billion for CY 2019, $14 billion for CYs 2020 and 2021, $6 billion for CYs 2022 and 2023, $5 billion for CYs 2024 and 2025 and $4 billion for CY 2026. For CYs 2019-2021, HHS must ensure that states spend at least $5 billion each year on premium stabilization (e.g., reinsurance or high-risk pools). The Senate bill identifies a formula for redistributing unspent money among other states. Latest draft includes an additional $70 billion for the long-term stability fund, the money was added to CYs 2022-2026. The total for the long-term stability fund in the latest draft is $132 billion.

States can apply for funding for one of four purposes: (i) to establish a program or mechanism to fund high-risk individuals to purchase health coverage including by reducing premiums for those who don’t have access to coverage; (ii) to enter into arrangements with health insurance issuers to assist in the purchase of health coverage by help stabilizing premiums and promoting state health insurance market participation; (iii) to provide payments for health care providers;  and (iv) to provide health insurance coverage by funding assistance to reduce out-of-pocket costs, such as copayments, coinsurance and deductibles, of individuals enrolled in plans offered in the individual market. Starting in CY 2022, states will have to pay a specific match rate to receive 100 percent of the federal amount as follows: 7 percent for CY 2022, 14 percent for CY 2023, 21 percent for CY 2024, 28 percent for CY 2025, and 35 percent for CY 2026. Latest draft amends some of the parameters states can use the fund for, as noted above in red.

BRAND New Provisions in Latest Draft

Continuous Coverage: Latest draft includes a provision that requires that starting in 2019 a person must maintain continuous health coverage or they will be subject to a 6-month waiting period to buy health insurance in the individual market. A “gap in continuous coverage” is defined as a significant break of 63 days or longer within a 12-month period or, if applying during a special enrollment period, no creditable coverage at any point during the 60 days prior to application submission.

Catastrophic Coverage: Latest draft allows any individual to enroll in a catastrophic health plan and that those individuals would be included in the single risk pool under the ACA and as stated above allow the premium subsidy to apply to the cost of a catastrophic plan.

Sen. Ted Cruz’s proposal: Latest draft includes bracketed language (commonly referred to as the Cruz amendment) that would allow insurers who sell compliant plans (at least one gold and one silver level qualified plan on the exchange) to sell plans exempt from many of the ACA insurance requirements in off-exchange markets, starting in 2020. It would not allow ACA subsidies to be used to buy these off-exchange plans, but does allow HSA dollars to be used to pay the monthly premium for high-deductible health plans, unless the plan includes abortion coverage.

ACA provisions waived by the Cruz amendment:

  • ACA metal tiers, i.e. bronze, silver, gold
  • Community rating
  • Pre-existing conditions
  • Guaranteed issue
  • Essential health benefits
  • Cost-sharing reductions in group health market
  • MLR rebate requirement
  • Requirements around preventive health

Congress seeks elusive consensus before summer recess

Barring cancellation of a portion or all of the scheduled summer recess—an event not currently expected despite the requests of several Republican senators and House members, as well as conservative media personalities—the House, when it returns for legislative business on July 11, will be in session for only 13 days before leaving on July 28, not to return till September 5. The Senate returns a day earlier, on July 10, and is scheduled to be in session for 15 days before also leaving for summer recess on July 28 and returning on September 5.

Below is an overview of some of the matters that may receive Congressional consideration before the end of July and our assessment of their current prospects.

Health care reform legislation

Senate GOP leadership decided on June 27 to delay consideration of the Better Care Reconciliation Act (BCRA), their proposed legislation to repeal and replace Obamacare. After several GOP senators stated their opposition to the BCRA draft, Senate Majority Leader Mitch McConnell (R-KY) was short of the votes he needed to bring the bill to the Senate floor. He has now spent his 4th of July holiday on the very challenging task of threading the needle and making changes to the BCRA that can win the votes of 50 Republican Senators to bring such health care legislation to the Senate floor and pass it.

To do so, Leader McConnell must address the concerns of conservative Republican Senators who say that the current version of the BCRA does not repeal and replace enough of the Affordable Care Act. At the same time, Leader McConnell also must be responsive to those moderate Republican Senators who say, among other things, that the cuts to Medicaid under the bill ($772 billion) are far too severe.   In addition, the CBO score that the bill would result in an estimated 22 million additional uninsured persons by 2026 is an attention-grabbing headline that has stoked public opposition to the bill.

Leader McConnell wants to bring a revised repeal-and-replace bill to the floor as soon as possible after the July 4th recess   The Congressional Budget Office is currently reviewing legislative language sent by Leader McConnell and will score the fiscal impact of these potential changes to the BCRA bill. The Senate parliamentarian will also have to consider whether these proposed changes can properly be raised in a reconciliation bill. These factors are likely to push any roll call on a revised BCRA bill to the last half of July, either during the weeks of July 17 or July 24, rather than immediately after the July 4 recess.

It currently seems as if any overture that Leader McConnell makes to either the conservative or more moderate wings of his Conference in an effort to win votes for the bill threatens the willingness of the other wing to support it. The key open question is whether Leader McConnell, an extremely skilled legislative tactician and veteran horse trader, can craft a compromise that will attract enough votes from both conservative and moderate Republican Senators to get to 50 votes.

The passage, or the abandonment, of Affordable Care Act (ACA) repeal-and-replace legislation, and when these events occur, is likely to have an enormous impact on the timing, the terms, and the likelihood of success for many key elements of the Republican legislative agenda. If the status of ACA repeal-and-replace legislation is not resolved until the final week in July, it surely will delay consideration of many of the subjects that Congressional Republicans hoped to consider before leaving at the end of July for their summer recess.

FY18 budget resolution

Because adoption of a fiscal year 2018 budget resolution will vitiate the reconciliation process of the FY17 budget resolution under which ACA repeal-and-replace legislation currently is being considered, the House will not adopt an FY18 budget resolution until it is definitively determined whether ACA repeal-and-replace legislation can be enacted through use of the reconciliation process.

House Budget Committee Chair Diane Black (R-TN) has been unable to finalize a budget because conservatives are demanding huge cuts to mandatory programs, such as food stamps. No agreement presently exists on how to spread the pain of the $200 billion in mandatory spending cuts (down from $500 billion in Chairman Black’s initial draft) that are necessary to offset the cost of the additional military spending that Black proposes. Republican moderates with concerns about the budget resolution say passage of such a resolution will make it more difficult to pass tax reform. Even if the House Budget Committee manages to push through a budget resolution at some point in July, it’s unclear whether it will be able to attract enough support from Republican moderates to make it through the House.

The Tuesday Group (moderate Republicans), because of their concern about the impact of entitlement cuts, particularly to Medicaid, on the public, and their belief that these mandatory spending cuts could “imperil tax reform,” has asked House Speaker Paul Ryan to delay consideration of a budget until health care legislation is passed or abandoned so that the members have a clearer idea of what the fiscal picture looks like. They have threatened to oppose the curbs in entitlement spending unless there is a bipartisan deal to increase spending caps. At the other end of the spectrum within the House Republican Conference, Freedom Caucus members say that they will back an FY18 budget resolution only if it cuts mandatory programs, including Medicaid and food stamps. (The Freedom Caucus and the Tuesday Group each represent enough House Republicans that either group’s opposition to an FY18 budget resolution would be sufficient to bring about its defeat.)

Moderates say that the budget resolution’s proposed $621.5 billion in defense spending (not including war funds) also would violate the law by exceeding the $548 billion cap on defense spending for FY18 under the Deficit Reduction Act.

FY18 appropriations bills

The continuing struggle over ACA repeal-and-replace legislation has delayed consideration of an FY18 budget resolution. The failure to adopt an FY18 budget resolution has left the Appropriations Committees in the dark as to the overall level of resources that will be available for spending in FY18. As a result, the FY18 appropriations bills are being marked up without any section 301 overall spending limit or any section 302(b)s divvying up the overall spending limits among the various appropriations bills.

The foregoing factors have led to a backlog in the appropriations process. With only 25 legislative days remaining in the House before FY17 ends on September 30, the House Appropriations Committee has now marked up about half of the bills and has reported to the House only its version of the FY18 Military Construction and Veterans Affairs Appropriations bill. With 27 legislative days remaining in the Senate until the FY17 fiscal year expires on September 30, the Senate Appropriations Committee has yet to mark up and report to the Senate any of the FY18 appropriations bills.

This backlog has led some House Republicans to propose that some or all of the appropriations bills be packaged in a single bill to be taken up by the House before the August recess as a way to accelerate consideration of the FY18 bills. Whether the House Republican leadership elects to move forward with such an omnibus appropriations bill, the delays in the appropriations process and the inactivity to date in the Senate on appropriations bills make it highly likely that a continuing resolution will be required to fund the federal government’s operations after September 30 and avoid a government shutdown.

Debt ceiling increase

Treasury Secretary Stephen Mnuchin wants the debt ceiling raised before the summer recess and a vote on raising the debt limit may be held immediately before the long August recess if health care has been dealt with by the end of the month, though it could slip to September if Treasury offers reassurances to Hill leaders that such a timeline would work. (The Congressional Budget Office says that, currently, extraordinary measures can get Treasury to October before the debt ceiling is reached.)

Health care has to get done first says House Majority Leader Kevin McCarthy (R-CA). The unanswered question is whether a coalition of Democratic and Republican members can be mobilized to pass a “clean” debt ceiling increase or whether Congressional Republicans will attempt the far more difficult task of tying an increase in the debt ceiling to the adoption of further spending cuts.

Tax reform

Comprehensive tax reform legislation is not expected to be introduced and considered by Congress before the summer recess. The Big Six—Treasury Secretary Mnuchin, National Economic Council Director Gary Cohn, Speaker Ryan, Senate Majority Leader Mitch McConnell, House Ways and Means Committee Chairman Kevin Brady and Senate Finance Committee Chairman Orrin Hatch—have been meeting to discuss tax reform, with the goal of reaching agreement on a framework to be considered by the House and the Senate this fall.

Meanwhile, Ways and Means will hold tax reform hearings in July, with a hearing on how tax reform will help small businesses grow and create jobs already scheduled for July 13. The Senate Finance Committee, for its part, will begin considering comments it has received as a result of Chairman Hatch’s June 16 request for submissions and recommendations for tax reform (Chairman Hatch’s letter gave a deadline of July 17).

Perhaps the most significant event for tax reform in July will be how the Senate deals with health care reform, as passing or failing to pass health care legislation will directly impact both its likelihood of success and potential scope. The reconciliation process can’t be used for tax reform unless and until there is an FY18 budget resolution and an FY18 budget resolution can’t be addressed until ACA repeal-and-replace legislation is disposed of, one way or the other.

Conflict in Iraq and Syria: Debate on the 2001 Authorization of Military Force (AUMF)

On Thursday, June 29, the House Appropriations Committee approved an amendment to the FY18 Defense Appropriations Act from Congresswoman Barbara Lee (D-CA). The amendment would repeal the 2001 Authorization for the Use Of Military Force (AUMF) 240 days after enactment of the Department of Defense Appropriations bill. As of 2013, the AUMF had been invoked more than 30 times to authorize troop deployments and other military measures, including detentions at Guantanamo Bay and military trials for terrorism suspects.

According to the Congressional Research Service, the AUMF has been used more than 37 times in 14 countries to justify military action. Under Presidents George W. Bush and Barack Obama, the AUMF was used to justify the deployment of US forces to Afghanistan, the Philippines, Georgia, Yemen, Djibouti, Kenya, Ethiopia, Eritrea, Iraq and Somalia. President Obama also used it to justify military action against ISIS, a group that did not even exist when the AUMF was adopted in 2001.

While Rep. Lee’s AUMF language is expected to be stripped from the FY18 Defense Appropriations bill at some point before it becomes law, the inclusion of this language in the text of the Defense Appropriations Act, as adopted by the House Appropriations Committee, makes it likely that the House, and possibly the Senate as well, will have a debate on the relevance and propriety of the AUMF language at some point before the Defense Appropriations Act becomes law. GOP military veterans have voiced strong support for a debate on the AUMF.

Flood insurance

Authorization for the National Flood Insurance Program expires at the end of September. A dispute in the Senate Banking Committee over a privatization proposal offered by Senator Jon Tester (D-MT) is keeping the version of an NFIP reauthorization from moving forward to date in the Banking Committee.

The House version of an NFIP reauthorization is further along. On June 15 and June 21, the House Financial Services Committee approved a package of seven flood insurance bills. While the House has yet to take up these bills, the chamber is expected to vote at some point in July on a five-year reauthorization of the NFIP. That said, several members of the Louisiana delegation say that because of reductions in funding levels and several controversial privatization proposals, this package of bills currently lacks the votes to pass the House. (The National Association of Homebuilders, the National Association of Realtors and many members of Congress are said to oppose the House bill.).

Infrastructure

While many observers hoped and believed that a proposal to upgrade America’s roads, bridges and airports would be an early priority for the Trump administration—as well as one with the potential to attract bipartisan support—it now seems clear that infrastructure sits behind health care, tax reform, a debt ceiling, government funding and even an FAA reauthorization on the administration’s legislative wish list.

On June 29, with the White House still yet to unveil formal legislative text for its massive infrastructure proposal and not expected to do so until the fall, Senate Commerce Committee Chairman John Thune (R-SD) observed that congressional work on the president’s $1 trillion infrastructure package would likely slip to next year.

FAA reauthorization

The House and Senate committees of jurisdiction have marked up two separate versions of FAA reauthorization bills, the major difference being air traffic control reform. The Senate bill lacks the ATC reform language and is very similar to the comprehensive bill passed (with a bipartisan majority) in the Senate in the 114th Congress. Congressman Bill Shuster (R-PA), chair of the House Committee on Transportation and Infrastructure, wants to bring his bill to the floor in mid-July. However with the expectation of a highly contentious dispute over the ATC privatization proposal, the bill’s prospects in the House are uncertain. Meanwhile, consideration of the Senate FAA reauthorization bill may be delayed by the pendency of health care legislation in the Senate.

The probable versus the promised as power changes in Washington

The 115th Congress kicked off on January 3 with Republicans in control of both the legislative and regulatory agenda in Washington — at least as much as a party without the magical 60 votes in the Senate can be. What was unimaginable for GOP leaders on election day is now tantalizing close, but only if President-elect Trump and Congressional Republicans can get and stay on the same page.

Whether or not the new president and Congressional Republicans will be able to work together to implement most of their respective agendas, there is no doubt that they share a goal of reversing much of the work of the Obama administration. The current president’s legacy is surely under siege and it will be illuminating and instructive to see how hard Senate Minority Leader Chuck Schumer (D-NY) and other Congressional Democrats will be willing to work to protect the former president’s achievements.

To that end, January will be the start of a very busy first few months of the new Congress as the Congressional Republican agenda is loaded. It starts with repealing Obamacare, although it’s not yet clear how long a transition period Republicans will propose. It also remains to be determined whether or when Republicans will offer a replacement alternative for those who will lose insurance coverage when Obamacare is repealed.

Once Obamacare is addressed, the candidates for legislative action are virtually endless as what for many years was simply the Congressional Republican wish list is now squarely within the realm of the possible. It involves such issues as undoing much of Dodd-Frank; reversing the Obama administration’s climate change agenda; making fundamental changes in immigration policy designed to strengthen the border and curb illegal immigration; moving away from global trade deals and toward bilateral agreements; substantially increasing defense spending while getting rid of the sequester and ending the policy of parity between defense and domestic discretionary spending increases; reforming the tax code perhaps through a border adjustment tax, nominating conservative judges to serve on the Supreme Court and all across the Federal bench; and making profound changes to federal personnel practices, including withdrawing various protections from federal employees, to make it easier to fire or discipline those employees whose performance is considered unacceptable or substandard.

Republicans will use all the parliamentary and executive authority available to them to pursue their goals. Under Majority Leader Mitch McConnell (R-KY), the Senate is expected to use Budget Reconciliation, a parliamentary tactic that only requires a simple majority in the Senate to end debate, as part of the effort to force the more controversial measures through the Senate floor and to the President’s desk. Beginning within minutes of his January 20 inauguration, the new tenant of the Oval Office also is expected to use his pen to undo Obama Administration Executive Orders and force the review of regulations the prior administration put into law.

The coin of the realm in Washington remains floor time in the Senate. There is no more precious commodity to an Administration’s agenda. When one reviews the President-elect’s agenda, pairs it with the agenda of the House and Senate leaders, and adds into the mix the left-over appropriations work from the 114th Congress that still must be addressed, one quickly realizes that the 115th Congress is setting up to be one of the busiest in recent memory. Notice we said busiest, we didn’t say productive, because the Democratic Senate Minority, particularly those Democratic Senators in states that President-elect Trump carried and who are up for reelection in 2018, will have significant sway over how much of this aggressive agenda finds its way to the president’s desk.

It is also critical to consider that not all Republicans, and this is especially true in the Senate, are necessarily in favor of the sweeping agenda the President-elect proposes. We are beginning to see this in the debate surrounding the repeal of ObamaCare, as GOP members in both chambers begin to question the necessity for immediately repealing with no replacement bill ready for floor consideration. Moreover, if President Trump elects early in his term to offer anything that looks like the massive infrastructure proposal he spoke of during the presidential campaign, we will see an early test of whether the conservative core of the House Republican conference view the Trump spending proposals as a bridge too far and not what they signed on for when they stood for election. We will likely see similar fissures surrounding immigration reform, trade policy and tax reform to name a few. As is true in all things, the devils are in the details.

We’ve added the chart below as a guidepost for what currently looks to be in the realm of the possible for the President-elect and his Republican colleagues. We would suggest that you “buckle up” as the rhetoric, pace and tweets coming out of Washington are likely to be at break neck speed in the coming months.

Trump Campaign Promises
Don’t need Congress Might need Congress Needs Congress
Approve Keystone XL pipeline Stop funding for “santuctuary cities” Repeal and replace Obamacare
Cancel payment on UN climate programs Renegotiate or withdraw from NAFTA Repeal Dodd Frank
Choose Supreme Court Nominee Impose tarrifs on companies moving overseas Build a wall
Act against foreign trade abuses Deport undocumented immigrants who have commited crimes End Common Core
Freeze Federal hiring   Pass a security bill
Label China a currency manipulator   Cut taxes
Leave Trans-Pacific partnership   Pass an infrastructure bill
Limit federal regulations   Pass an ethics bill
Overturn protections for certain undocumented immigrants   Restrict lobbying by former members of Congress
Propose term limits for Congress   Pass a child care bill
Roll back environmental regulations   Pass a law enforcement bill
Suspend immigration from “terror prone regions”   Confirm a new Justice (Senate only)
Tighten lobbying restrictions on Executive Branch employees   Term limits for Congress