The latest SBLC Alert from the Small Business Legislative Council (SBLC) provides an update on the status of healthcare and tax reform.

Healthcare Reform – What The Heck Is Going On?

Despite ongoing discussions taking place at the White House and on the Hill, many experts have been predicting that any chance for healthcare reform this year is over and that Congress and the President have moved on to tax reform. However, our crystal ball tells us that healthcare reform may not be totally dead—specifically because certain key parts of healthcare reform are closely tied to what the Republicans want to do with tax reform.

Remember the Republicans expected to use reconciliation on the 2017 budget in order to repeal large portions of the Affordable Care Act (the “ACA” or “Obamacare”). Part of this process was designed to repeal certain significant taxes that came in under the ACA, particularly the 3.8 percent net investment tax, the Cadillac tax, and the medical device tax. If these taxes don’t get repealed or delayed under a health reform package passed using 2017 budget reconciliation, the Republicans have to deal with at least some of them through tax reform.

The Republicans made their intent to use reconciliation on the 2018 budget to pursue tax reform legislation very clear. This tax reform package is expected to come out as soon as August (though some in leadership have suggested it may be later). Including the ACA taxes in a tax reform package will make for even heavier lifting for tax reform because it will significantly increase the cost of tax reform.

The potential cost of tax reform is already something that the Republicans are grappling with both from a procedural stand point (because any provisions of a reconciliation bill that increases the deficit outside the budget will have to sunset unless the title of the bill as a whole is deficit neutral) and a political one (as many members of the party have long opposed any proposals that would increase the deficit).

In light of all these factors, it is hard to believe that the Republicans would be willing to lose the opportunity provided by the 2017 budget reconciliation. Because logic dictates that the Republicans won’t want to throw away this opportunity, we would not be surprised to see some sort of healthcare bill coming out of the House that would be not nearly as ambitious as the first bill, the American Health Care Act (AHCA), but something that will allow Republicans to say that they have repealed the more onerous provisions of the ACA and eliminate some of the ACA taxes so that they don’t have to deal with them down the line.

In such event, the Freedom Caucus (that played a pivotal role in forestalling the last healthcare bill) remains a wild card. Interestingly the Freedom Caucus opposed the healthcare bill because they did not think it went far enough, despite the fact that it included a number of provisions such as those that would have effectively capped Medicaid expenditures, which the Freedom Caucus would typically embrace.

Now for the million-dollar question. Since the Senate rules just changed for votes on the nominations of Supreme Court justices, why should the Senate stop there? It takes only a majority vote to change the rules of the Senate. Remember that just a few years back when the Senate was controlled by the Democrats they were the first ones to change the filibuster rules by eliminating it for votes on judges below the Supreme Court level. While it is extremely unlikely, there is always the chance that the Senate could eliminate the legislative filibuster so that, like in the House, any bill can get passed with just a simple majority.

If history were to take a sharp left turn in the form of the elimination of the legislative filibuster, then all of a sudden the magic of the reconciliation process vanishes and the Senate basically starts operating like the House. If this super nova explosion were to occur in the Senate, then the Republicans would only have to fight amongst themselves and it’s a good bet that they would figure out how to work things out eventually (particularly without the procedural restraints of reconciliation tying them down). It’s hard to imagine the Senate without the 60-person vote requirement (i.e., the filibuster). We’ve seen over the last few decades how the need for 60 votes to break a filibuster in the Senate has kept both parties more mainstream than either would have wanted. If this change were to occur (which again, we are not predicting that it will but do think it is a possibility) then while the legislature will undoubtedly be able to get things accomplished once again, it is likely the country will see wide swings in policy every few years that would make long range planning for businesses almost impossible. As it is with the filibuster repealed for voting for Supreme Court justices, look for a far more ideologically driven court than we’ve seen over the past 50 years.

What About Tax Reform?

Regardless of what happens with the filibuster and healthcare reform, there is still a good chance for at least some tax reform. Tax reform is a major priority for President Trump and most of the Republicans in the Congress. Unfortunately, the problem with major tax reform still remains—Congress must either be willing to eliminate a number of well-liked deductions and credits (often referred to as tax expenditures) in order to simplify the tax code and most importantly reduce tax rates low enough that the public feels like they’ve come out ahead or it has to find new sources of tax revenue that can be stomached by the majority of businesses and Americans that actually pay federal income tax (currently only roughly 50 percent of all Americans pay any federal income tax). Remember, in their respective tax reform plans both the House Republicans and Trump also want to eliminate the AMT which brings in more and more revenue as it continues to hit more and more middle income taxpayers which was never its intent (originally it was enacted to make approximately 13 of the highest income taxpayers in the country pay some tax).

Eliminating special interest “loopholes” like giving tax breaks to NASCAR and the production of films will not generate enough revenue to be able to significantly reduce tax rates. To meaningfully cut rates, Congress is going to have to reduce some of the big ticket and most popular items like the mortgage interest deduction (the House plan does not), the deduction for employer provided health insurance (looks like the amount of the deduction would be capped under the House proposal), the charitable contribution deduction (does not look like this will be touched under the House plan), and the deduction for retirement plan contributions (the House plan seems to leave an opening here to cut back on this deduction). The only other way to accomplish this onerous task is to come up with new tax revenue. The House plan does this by the proposed border adjustment tax which is a fancy name for saying that imports would be subject to tax and exports would be free of tax. As we have all seen, this proposal which would be a major generator of new tax revenue is not being embraced with open arms. If this proposal doesn’t work, then the Republican leadership will have to go back to the drawing board. If this happens, we anticipate seeing a VAT (value-added tax) being considered at some point since America is one of the few developed countries that does not have one. In fact, 140 countries around the world have a VAT.

In short, it seems improbable, though not impossible, that a Republican-controlled Congress with a Republican President would not take advantage of this opportunity to reform the tax code.

The mission of the SBLC, of which PPAI is a member and for which PPAI President and CEO Paul Bellantone, CAE, serves as a board director, is twofold: to make improvements in public policy for small business and to help member associations in their communications with business members. Note that this report is for the sole personal, informational use of PPAI members and should not be posted to any website.