After Failed ACA Repeal Attempt, GOP Shifts Focus to Tax Reform

The Trump administration and GOP Congressional leadership reiterated their commitment to passing comprehensive tax reform, but the ACA’s taxes on high-income individuals will remain in place.

Tuesday, April 4, 2017

On March 24, House Speaker Paul Ryan (R-Wisconsin) pulled the Republicans’ bill to repeal and replace the Affordable Care Act (ACA or “Obamacare”) before it was brought to vote because Speaker Ryan and President Donald Trump were unable to rally enough support among House Republicans for the bill. While the defeat of the repeal-and-replace effort marked a major setback for the GOP, the White House and Republican leadership in Congress emphasized that they will continue their efforts to lower taxes on businesses and individuals as part of what would be the first comprehensive reform of U.S. tax laws since 1986.

ACA Taxes on High Earners Will Remain
Eliminating the taxes on high-income taxpayers that were created to help pay for the ACA’s healthcare subsidies will not be part of any comprehensive tax reform bill. Speaker Ryan said that the defeat of the GOP’s repeal-and-replace efforts means that the 0.9% Medicare tax surcharge for individuals earning more than $200,000 and married couples earning more than $250,000 and the 3.8% tax on investment income for high earners will remain in place.

White House and GOP Congressional Leadership Reiterate Commitment to Comprehensive Tax Reform
Soon after the ACA repeal-and-replace bill was pulled, President Trump, Treasury Secretary Steven Mnuchin, and House GOP leadership all reaffirmed their commitment to comprehensive tax reform that would lower rates for businesses and individuals. Secretary Mnuchin reiterated on March 24 that these goals would be pursued through one larger bill rather than by trying to pass several smaller bills.

Secretary Mnuchin said that his office is making progress on the creation of a tax plan and has previously said that the White House’s goal is to have the bill passed before Congress leaves for its August recess. On March 29, Rep. Kevin Brady, (R-Texas), chairman of the House Ways and Means Committee, said in an interview with Fox Business Network that a tax reform bill will be introduced in the House in 2017.

Challenges to Comprehensive Tax Reform
Passing comprehensive tax reform under any circumstances has proven to be especially challenging for either party over the past several decades. Despite tax reform being a common theme repeated on the campaign trail every four years, the last overhaul of the U.S. tax code happened in 1986. Speaker Ryan told reporters on March 24 that the defeat of the GOP’s ACA repeal-and-replace efforts will “make tax reform more difficult, but it does not in any way make it impossible.”

Among Republicans, there are some divisions about whether tax cuts should be allowed to add to the deficit or whether new sources of revenue should be used to make up for the revenue lost from lowering rates. One of the more contentious ideas for raising additional revenue is the border-adjustment provision that is part of the House GOP tax plan. This provision, which would place a tax on imports but not on exports, could raise an estimated additional $1 trillion of new revenue, according to The Wall Street Journal. Several Republicans in the Senate are strongly opposed to border adjustment, and the Trump administration has expressed some concerns as well.

One source of new revenue that seems to have broader support is limiting the value of itemized deductions. It remains to be seen, however, how far those limits would apply to the more popular deductions, such as deductions for mortgage interest, charitable contributions, and state and local income taxes. The House GOP plan calls for eliminating all itemized deductions except for mortgage interest and charitable contributions. The plan that President Trump proposed during the campaign would keep all itemized deductions but limit the value of itemized deductions that could be claimed. Both plans also call for increasing the value of the standard deduction, which means that fewer taxpayers would have incentives to itemize deductions on their tax returns.

According to The Wall Street Journal, Republican lawmakers plan on using a process known as “reconciliation” to move the tax-reform bill through Congress. According to the Tax Policy Institute, reconciliation is a process that Congressional budget committees can use to ensure tax laws and mandatory spending programs are revised according to the budget resolution’s revenue and spending targets. The process, which is a way to fast-track revenue and spending bills, would allow the bill to avoid a filibuster in the Senate and pass without any votes from Democrats. The reconciliation process, however, prohibits increasing the budget deficit beyond the budget window, which is typically 10 years.

It is yet to be seen how much the Trump administration plans to reach out to Democrats in crafting the tax plan—or how much Democrats would be willing to work with the White House and Republican leadership in Congress. While the reconciliation process creates a path for Republicans, who have majorities in both houses of Congress, to pass a bill without any votes from Democrats, proceeding with this option does not ensure passage of a bill—as Republicans learned with the failed ACA repeal-and-replace effort.

It is believed that Democrats will strongly oppose tax changes that would result in lower tax bills for wealthy individuals. The tax plan proposed by House GOP leadership in June 2016 would allow taxpayers to deduct half of their income from capital gains, dividends, and interest. The plan that then-candidate Trump proposed on the campaign trail, however, would leave taxes on investment income largely unchanged. Treasury Secretary Mnuchin told CNBC in February that the administration is "primarily focused on a middle-income tax cut and a simplification for business." Mnuchin has emphasized that tax cuts that benefit wealthy taxpayers would be coupled with limiting deductions and eliminating other measures that primarily benefit high-income earners.

To learn more about the tax plans that House Republicans and then-candidate Trump proposed on the campaign trail and what these changes would mean for high-net-worth investors, download our February report: Post-Election Tax Planning Considerations for Investors.

Keeping an Eye on Washington
Republicans’ inability, for now, to repeal and replace the ACA illustrates the challenges of passing major legislation, even when one party controls the White House and both houses of Congress. Crafting legislation to overhaul tax laws is a fluid, complex process, and many of the details of the Republicans’ proposed plan will be determined over the next several months.

At William Blair, we believe that it is still too early for high-net-worth investors to alter their investment or tax strategies based on any of the proposed plans. We will be closely monitoring the developments in Washington and keep you updated as the details of the tax reform legislation come into focus.

Private Wealth Updates

William Blair produces educational and timely communications on a variety of wealth management topics of interest to individuals and families at all generational stages of life, philanthropic foundations, and not-for-profit organizations.



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