Senate Majority Leader Mitch McConnell (R.-Ky.) faces a tough decision on what to do with the tax increases that were put in place by the 2010 Affordable Care Act, a decision that will have major implications not only for the GOP repeal effort, but for Republicans' next major legislative push.

Last month, McConnell tried to advance a bill that would have cut future revenues by $700 billion over 10 years by eliminating a number of tax provisions in the ACA. This included a $172.2 billion cut over 10 years by repealing the “net investment tax” and another $58.6 billion by repealing the Medicare Tax Increase.

Both of those tax cuts would primarily benefit wealthier Americans. The 3.8 percent net investment tax applied to capital gains and other investments for individuals making more than $200,000 in annual income or married couples making more than $250,000.

The Medicare Tax Increase added a 0.9 percent tax increase for people in the same income threshold.

That bill faltered in the Senate, as Republican support splintered. A number of GOP lawmakers said that they should not cut taxes in a way that benefits wealthy Americans while voting on a bill that would cut benefits for the poor.

Now McConnell faces several options:

  • Cut the taxes. Many conservatives feel that if they are going to repeal the Affordable Care Act, they really need to target the tax increases, and that includes both the capital gains tax and the Medicare tax. Also, by repealing both of these taxes now, it would make it easier for them to overhaul the tax code later this year. The reasons for this are slightly complicated, but the more taxes they try to cut at once later in the year, the harder it will be without support from Democrats.
  • Keep the taxes. By keeping the tax increases, McConnell would be locking in place key parts of the Affordable Care Act, even if he pushes to cut other parts of the law. It would also give him more than $200 billion in new revenue that he could add to parts of the repeal effort. In other words, he could divert that money to certain hospitals or programs that might help him secure key votes.
    McConnell could then seek to repeal the taxes later on, probably as part of some comprehensive tax reform. That way, said Bill Hoagland, a former GOP congressional aide and health-care executive, Republicans could avoid the politics of reducing health-care benefits for the poor and middle class while cutting taxes for the rich. "It’s much easier at that point," he said.
    But if Republicans fail to pass a tax overhaul, they'll have missed their chance. "If they don’t get rid of the investment surtax in the Obamacare repeal bill, they aren't going to get rid of it at all," said Steve Moore, a former top economic adviser for the Trump campaign last year.
  • Sunset the taxes. This is the approach currently getting a serious look by key Republicans. It would keep the taxes, but only for between five and seven years. So the taxes would eventually expire, but McConnell would get billions of dollars in revenue and Republicans could maintain that they weren’t immediately cutting taxes for the rich. If this idea ends up becoming law, look for many wealthy Americans to defer taking any capital gains until the tax expires, even if that’s five or seven years down the road.