Businesses across the nation are anticipating some major changes to occur in 2017 in the areas of healthcare and tax reform. While anticipating significant change, planning at this point is a bit of challenge, because no one can predict with accuracy the extent of transformation or the exactness of the timing. For sure much debate will ensue on both areas of healthcare and tax reform; not only across party lines but within each party as well. With no attempt to make any clear predictions, we thought we might outline the processes and obstacles. While it is one thing to proclaim that taxes will come down or that Obamacare will be repealed, the devil for certain is in the details.
OBAMACARE REPEAL
The Legislative Reality
For the most part the Republican Party will have its way in the House; once it comes together within itself on positions. The Senate, however, could be another story. The Republicans control 52 seats in the Senate, and the Senate still has the filibuster rule, which requires 60 votes to quash. A full repeal of the ACA would require 60 votes. Resultantly, some Democrats will have to agree on such a measure for it to succeed. The Senate, however, has this thing called a reconciliation process under which some aspects of the ACA could be repealed. Reconciliation allows consideration of a budget bill with limited debate; bills that directly affect revenues and/or outlays.
Procedurally, as we understand it, Congress would adopt a budget bill with reconciliation instructions to various committees to develop budgetary parameters. The committee recommendations are packaged as an “omnibus reconciliation bill” which can be passed in the Senate under special rules that limit debate to 20 hours. Thus, a filibuster cannot be launched, and a budget/revenue/tax matter can be passed with a simple 51 percent majority. Elements of the ACA that could be eligible for repeal under reconciliation would include:
- The individual mandate
- Cadillac tax
- Medicaid expansion
- The employer mandate
- Medical device tax
- 3.8% surtax on investment income
- Small business tax credit
- TRF & PCORI fees
But — under the omnibus reconciliation process, many ACA provisions cannot be repealed with 51 percent and would require 60 votes in the Senate. These elements include:
- Pre-existing conditions rules
- First-dollar wellness mandate
- Unlimited annual benefits
- Unlimited lifetime benefits
- Nondiscrimination rules
- Minimum value rules
- Common control mandate
- Prohibition on recessions
- Women’s wellness package
- Keeping children on coverage until age 26
- Patient protections
- Full coverage for mental/nervous/substance abuse
- Medical loss ratio rules
- Community rating for small groups & individual
- Appeals process
- Reporting and disclosure mandates
- Guaranteed availability of coverage
- Guaranteed renewability of coverage
- 90-day waiting period maximum
Therefore, to think that within days of the Trump inauguration that Obamacare will be swept out the door might be wishful thinking when considering the legislative actuality.
Replacement Law
Recall that the Republican commitment is to repeal and replace. The major unknown of course is the makeup of the replacement. Just from what we hear, such as comments from the speaker of House, we would expect that any repeal bill introduced early next year will have a two or three year effective date; this is to allow Congress sufficient time to craft replacement legislation. The choice of two or three years could be more of a political decision. If Trump is successful and widely popular, the Republicans would benefit if repeal and replace is resolved prior to the mid-term elections. If the opposite were the case, then maybe they might not want to have the replacement as a campaign issue for the Democrats in two years.
Bear in mind that many ACA provisions are well thought of on both sides of the aisle; things such as first-dollar preventive; no preexisting conditions; women’s wellness; children under age 26; no annual or lifetime caps on benefits. Further, there are millions and millions of people who would lose coverage if repeal is enacted lacking an adequate replacement. This count begins will the some 25 million covered in the exchange. Also, we will see millions who work between 30 and 40 hours a week lose employer coverage when employers are allowed to return to common sense and use 40 hours a week as the full-time definition. A third layer involves employers who will return to historic positions of not offering coverage to hourly employees. A smaller category, that yet must be considered are the number of small businesses that were affected by the controlled group rules. Regardless, both Congress and the president-elect appear to understand that coverage alternatives must be in place for those affected individuals.
Another thought involves coverage rules. We suspect that Congress will want some controls over participation and nondiscrimination. Prior to ACA, employers could install an insured group plan just for selected managerial personnel and enjoy its full package of tax benefits while excluding rank and file employees. Would we not think it likely that members on either side wish to return to this scenario. Thus, one would think that some manner of nondiscrimination rules would be included in the replacement legislation.
The New Format?
The most common “talking points” heard in congressional circles are expanded health savings accounts and selling across state lines. In an earlier alert we outlined the challenges to selling across state lines. Similarly, while health saving accounts for all is an exciting concept, tax benefits will do little to assist the lower income segments of the population or older citizens.
Most Republican segments, including the incoming secretary of Health and Human Services, speak fondly of health insurance tax credits. All citizens would receive an advanced tax credit that can be used to purchase individual or employer health insurance. We would suspect that the amount of credit would be scaled based on income, and that lower income people would be handled in a similar manner as the earned income tax credit. Many Republican camps also are proponents of capping the employer deduction for group health plans to offset the revenue cost associated with these individual tax credits, should they be enacted.
One element to a replacement law that will surely generate much debate is the subject of those of lower income. Trump has indicated a commitment to some manner of a government option as a safety net when the ACA repeal is effective. He has said he will not allow a situation of people “dying on the streets” because they do not have health coverage. Along this line, there is talk of expanding Medicare; a new federal option; or block grants to the states that would establish their own coverage plans.
It is counter-productive to even attempt to forecast what the new health care law will be like, but just know that while change is forthcoming, there with certainty will be some level of federal regulation going forward, and full repeal may be a couple of years in the making.
TAX REFORM
Both Congress and the incoming administration appear poised for major tax reform in 2017. Very little detail is available at this point; but the overall goal is to dramatically simplify the tax code and bring down the level of tax. One thing for certain will be strenuous debate over the impact that tax reduction will have on the federal deficit and how such shortfall will be handled.
Under the House framework, individual tax brackets would be reduced to three levels: 12 percent for married couples making under $75,000; 25 percent married filing jointly for income between $75,000 and $225,000; and 33 percent for married couples above $225,000. Single taxpayer thresholds would be half of these levels, and the head of household category would be eliminated.
The standard deduction would be raised to $25,000 for married filing jointly; $12,000 single; and $18,000 for single parent. The personal exemption would be eliminated. The capital gains rate would be half the regular marginal rates; thus 16.5 percent, 12.5 percent, and 6 percent.
Under the Trump outline, we would see the same 12 percent, 25 percent, and 33 percent marginal brackets; but he would add a 0 percent bracket for single taxpayers earning less than $25,000 and married couples earning less than $50,000. The President-elect would leave the capital gains rate where it is at 20 percent; eliminate the personal exemption; and increase the standard deduction. His plan would cap itemized deductions at $200,000 for married couples and $100,000 for a single filer; and increase the standard deduction to $15,000 for single filers and $30,000 married.
Both camps plan on “paying for” their tax cuts with extensive cuts in write-offs and deductions both on the personal side and business side. The House plan appears committed to preserving the charitable deduction, home mortgage deduction, education tax credits, and the child care tax credit.
Looking at business tax rates, the House outline would cut the maximum business income tax to 20 percent. The Trump thought is to go to 15 percent. In either case small business would be put at a large disadvantage to large business, because some three-fourths of small businesses are organized as tax pass-through companies (LLC or S Corp) where the business profit is taxed personally to the owners. Resultantly, while big business would be capped at either 15 percent or 20 percent, small business would face a 33 percent marginal tax rate. Thus, the House outline discusses capping the tax on business income passed through to LLC or S Corp owners at 25 percent. There is no similar provision in the Trump position. The Trump framework would permit the deduction of capital expenditures. Under the House draft employers could expense all property purchases except land. Both summaries would deny an interest deduction associated with the purchase of these assets. LIFO, which has been under such IRS attack, would apparently be preserved under both plans; and net operating losses could be carried forward indefinitely under both versions.
Taxation of foreign profits would change under either plan. Currently, if we understand correctly, businesses pay U.S. tax on inventory sold overseas but only if brought back into the country. This has resulted in a massive amount of cash being parked overseas. Trump proposes a special 10 percent repatriation tax on those funds to encourage businesses to bring those monies home and put them to work in the economy. Both the Trump team and the House would change to a system to prevent this scenario in the future.
The individual and business alternative minimum tax would be repealed under both concepts; along with the 3.8 percent surtax, the Cadillac tax, and the medical device tax. The estate and gift tax would be repealed under each version. Repeal of the estate tax without clear thought could actually create death taxes for small and family businesses and farms that does not exist today. Currently the first $5.45 million of assets are exempt from the estate tax. Part and parcel, we have stepped up basis which provides that the cost basis of inherited assets is stepped up to the fair market value as of the date of death. Congress correctly did not want to impose both estate and capital gains taxes together.
For example, if one invested $1,000 in an asset that was worth $2,000 on his/her date of death, heirs would have a cost basis stepped up to $2,000 and avoid capital gains if the asset were sold soon after death. Many small businesses owner estates are under contract to sell their interests at death under buy/sell agreements. Other heirs are unable or unwilling to continue the business or farm and must sell it after the death of the founder. Regardless, most small businesses fall within the $10.9 million per married couple exemption and incur no or little capital gains taxes; thus do not now experience any manner of “death taxes.” If stepped up basis is swept out with the estate tax, those businesses will see a new wave of death taxes in terms of capital gains. The Trump camp has discussed solving this adverse situation by preserving stepped up basis on the first $10 million of inherited assets.
WAGE AND HOUR ISSUES
You are aware that the Department of Labor issued regulations intended to be effective for 2017 that would dramatically increase the threshold for exempt employees regarding overtime pay. A federal judge issued a preliminary injunction against those new rules in November. The administration filed for an expedited appeal in the 5th Circuit Court of Appeals. That court ordered final briefs filed by Jan. 31. Legislation has been developed to outlaw these new rules, but we once again have the 60 percent vote needed, which is unlikely to happen. Alternatively, the Trump administration could simply elect not to pursue the appeal. Many in this field of practice believe the new overtime rules will never see the light of day, but of course no one knows for sure. Further, there is the constant conversation regarding an increase in the minimum wage. A few states on their own have already taken action. During the campaign, Trump expressed favor for an increase in the minimum wage; mentioning $10 an hour as reasonable. However, his incoming secretary of Labor, having a business background in the fast food industry, may persuade him otherwise.
“The only thing that is constant is change.” ~ Heraclitus
