The Senate Republican leadership’s health plan loses about $300 billion less revenue than the House-passed health bill. Yet, most of the tax cuts in the two bills are identical. What accounts for this apparent contradiction? Part of the explanation lies in the way the House bill and Senate leadership plan treat the medical expense deduction. But most has to do with differences in the design of their tax credit subsidies.
According to the Congressional Budget Office, the Senate plan would reduce federal revenue by about $700 billion over 10 years while the House bill would cut revenues by nearly $1 trillion. We don’t know exactly what accounts for the different CBO scores, but the Tax Policy Center’s expert on health taxes, Gordon Mermin, helped me understand what may be going on.
Two Pieces
CBO divides the revenue provisions of the bills into two parts: The first are those coverage provisions—primarily the tax credits to subsidize the cost of individual health insurance. About two-thirds of the $300 billion difference in the two bills comes from the variation in these individual insurance tax subsidies.
The second chunk includes what CBO calls non-coverage provisions. They are the elements that would repeal Affordable Care Act taxes that have no direct connection to government insurance subsidies. They include the 3.8 percent net investment income tax and the 0.9 percent Medicare payroll tax surtax aimed at high-income households, and a package of tax hikes on health-related businesses such as insurance companies, drug companies, and medical device makers. They account for the remaining $100 billion difference.
The Big Story
The big story lives within the first part, however. Overall, the Senate’s tax-related coverage provisions would reduce revenues by about $138 billion over 10 years, compared to $332 billion in the House bill.
The Senate leadership plan appears to be less generous overall, which would reduce the revenue loss from its plan relative to the House bill. The Senate plan is also more targeted to low- and moderate-income consumers. It provides tax credits for those making 350 percent of the poverty rate ($41,580 for singles and $85,050 for a family of four). The House bill builds its subsidies mostly around age, though it would phase them out for individuals making more than $75,000 or families making more than $150,000.
These changes in design could have a significant impact on revenue. Not only would fewer people be eligible for the Senate credits but for many the subsidies themselves would be smaller since they’d be tied to lower-cost insurance plans. In addition, CBO projects that because coverage would be so limited, many of those eligible for subsidies would likely turn down coverage, and thus fewer would use the subsidies.
Because the Senate bill would provide more tax credits to low-income people, many of whom pay little or no federal income tax, it is possible that a larger fraction of the Senate plan subsidies would be delivered in the form of refundable credits. And CBO treats the refundable portion of tax credits as spending rather than reductions in revenue. Thus, it is possible that CBO scored a greater share of the Senate’s credits as spending, though we don’t know by how much.
The Medical Expense Deduction
Most of the remaining difference-- about $90 billion of the $300 billion—results from the Senate’s less generous individual income tax deduction for medical expenses. Today, taxpayers can’t deduct these costs unless they exceed 10 percent of their Adjusted Gross Income. The House bill would allow people to take a tax deduction for medical costs that exceed 5.8 percent of income. The Senate bill would set the threshold at 7.5 percent, where it was before the ACA. Because it would be available to fewer people, its revenue loss would be smaller.
Bottom line: Most of the $300 billion revenue difference likely reflects differences in the tax subsidy designs of the two plans. One-third represents differences in one provision—the medical expense deduction. The rest results from accounting differences and some other small changes.
