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Why Republicans are thinking of keeping an Obamacare tax on the rich

Demonstrators block a Salt Lake City street during a protest against the Republican health-care bill. (Rick Bowmer/AP)

To fund changes that could make its health-care bill more palatable to critics, Senate Republicans are considering leaving in place one of the Affordable Care Act's taxes on the wealthiest Americans — a tax that has long been unpopular with conservatives.

The details of which taxes would be scaled back and by how much haven't been officially released, but The Washington Post reported that Sen. Majority Leader Mitch McConnell (R-Ky.) was rewriting the bill to preserve a tax on investment income for families that made more than $250,000 a year or individuals who made more than $200,000. Over a decade, that tax is projected to add up to $172 billion by the Congressional Budget Office and Joint Committee on Taxation.

“The fewer changes, the more of all these pieces you leave in place, the closer and closer it comes to looking like current law,” said Adam Looney, a senior fellow at the Brookings Institution who worked at Treasury during President Barack Obama's administration.

Republicans will reportedly use the money from preserving the tax to help lower- and moderate-income Americans afford health coverage and provide funding related to the opioid epidemic, but how the money would specifically be allocated was unclear.

“Without higher deficits to finance this, eventually  you might have to pay for it — and they’re running out of places to go,” said Tom Miller of the conservative American Enterprise Institute.

Here are some ways they could potentially change the bill:

• Republicans could restructure the way the bill provides financial assistance to lower- and moderate-income Americans who buy private insurance. The health-care bill provides income-based subsidies for people to buy insurance, similar to the Affordable Care Act. But those plans are likely to have higher deductibles. That's because the bill would change the benchmark plan to one that is fundamentally less generous than the one currently used. It would force consumers to pick up a bigger percentage of their health care costs. That raises the question of whether the plans will truly be affordable for the poor in particular, and Republicans could restructure that financial assistance.

• The money could be used to make the Medicaid cuts smaller in the early years. Republicans could make the ramp-down of the Medicaid expansion a little less steep by spreading the phaseout over a longer period, a change that could ease the short-term coverage losses.

• Republicans could also choose to focus on the later years, by altering the formula that will be used to increase the federal funding for Medicaid recipients each year. Right now, that money will start growing at a slower rate starting in 2025. Pushing that date back or changing the rate might be a way to ameliorate concerns about Medicaid cuts.

• The money could be tailored to causes that benefit particular lawmakers, such as a fund to help deal with the opioid problem. That fund could be tailored in such a way that it provides the most aid to states whose lawmakers have expressed reservations about the bill.

Miller said that the party's biggest challenge lies in the unpopularity of the Medicaid cuts and that there are a variety of ways they could use the money to try to assuage critics' concerns. But he noted that each change could create more problems that need to be solved. For example, if Republicans lengthened the phaseout of the Medicaid expansion, they run the risk of provoking the ire of states that did not expand Medicaid — which may feel betrayed because expansion states continue to benefit for longer.

What is apparently not being discussed are the major tax repeals that are being granted to health-care industries, including health insurers, pharmaceutical companies, and medical device makers. Those industries have been noticeably muted as the bill has been crafted and launched.

“At the moment, [Republicans are] trying to keep industry happy,” Miller said. “I’d say go stick it to pharma. That's hardball, and they're not playing hardball.”

It is unclear whether leaving the tax in place would give the Republicans the ability to change the bill enough to make it palatable to holdouts, and it could complicate the party's next agenda item, tax reform, said Scott Greenberg, a senior analyst at the Tax Foundation. If Republicans decide to put off the repeal of the net investment income tax until tax reform, they will need to find a corresponding provision to cut spending or raise $172 billion in revenue if they hope to leave the long-term deficit unchanged.

“The fear for some folks interested in tax reform is if the net investment income tax doesn’t get repealed as part of health reform, then lawmakers might find themselves wanting to repeal it as part of tax reform,” Greenberg said. “It’s $172 billion, and that’s not insignificant. There are not so many stand-alone provisions that could be used to pay for that.”