GOP tax plans could be a mixed bag for practices, providers
The proposed Republican tax plans, both in the House and Senate, would be something of a mixed bag in terms of their impact on medical practices, an analysis by The Business of Medicine shows. Both versions would reduce taxes for large healthcare organizations and their executives, while individual physicians could see lower personal taxes. But these benefits could be partially offset by less revenue from the Medicare and Medicaid programs, whose funding could be reduced to help pay for these tax cuts.
For all their similarities, there are also significant differences between the House and Senate bills which must be reconciled before a final version can be signed into law by President Donald J. Trump.
A tale of two bills
The House bill was unveiled first and could potentially cost more than the Senate version. Below is a list of key provisions in both bills along with an explanation of how they differ.
- Corporate tax rate is reduced from 35% to 20%. The high American corporate tax rate, which President Trump has repeatedly railed against, is at the heart of both GOP proposals. However, the House version would implement the cut immediately while the Senate version implements the cut with a one-year delay. The delay is intended to give Republicans more time to determine how to preserve popular tax deductions that the House bill would remove.
- Reconfigured tax brackets. Currently there are seven tax brackets which the House plan would simplify into four brackets: 12%, 25%, 35%, and a top rate of 39.6% that remains the same. The Senate bill keeps the existing seven brackets at 10%, 12%, 22.5%, 25%, 32.5%, 35%, and a newly reduced top rate of 38.5% for the highest-income individuals and couples.
- Small businesses and the pass-through tax rate. A controversial provision in the House bill is the creation of a special 25% tax bracket for “pass-through” businesses, including sole proprietorships, partnerships, and S corporations that are currently taxed at the individual rate of their owners. The Senate plan doesn’t create a new bracket, but instead allows a 17.4% deduction on income taxes for pass-through business owners, but makes service businesses ineligible for this classification (except for households with taxable income below $75,000 for single filers and $150,000 for married filers). Unfortunately for healthcare providers, medical care would be defined as services unless not labor-related; thus as written neither version would grant a benefit to providers.
- Differences in deductions. A major difference between the House and Senate is how they handle two key deductions, one for state, local, sales and property taxes (called SALT) and one for mortgage interest debt. The House would gut the SALT deduction, limiting it to property taxes only and capping it at $10,000. The Senate bill goes farther, completely eliminating the SALT deductions. The SALT deductions typically benefit upper-middle-class families who own single-family homes, a demographic that includes most healthcare providers.
- Mortgage deduction differences. The second key difference is that the House bill would cut mortgage interest deduction by half. Currently, mortgage interest can be deducted on debt up to $1 million; the House would cap the debt limit at $500,000. This could affect many physicians. The Senate version would make no change to the deduction. This single measure is responsible for much of the deficits that the House bill is projected to cause.
Senate bill links tax reform to ACA
Most recently, the Senate has added a provision to its tax bill that would eliminate the controversial Affordable Care Act (ACA) rule that all persons must purchase health insurance. This “individual mandate” has proven unpopular though the Obama administration argued that it was needed from a policy standpoint to halt skyrocketing premiums with insurers being prohibited from not covering preexisting conditions.
For Senate Republicans, linking the ACA to tax reform is more than just an effort to keep the ACA repeal effort alive. They argue that eliminating the individual mandate means stopping federal subsidy payments to help the poor afford coverage, which will result in massive budget savings to offset the deficits that the tax provisions will incur.
Medicare, Medicaid could pay for tax cuts
The other option to mitigate the final tax bill’s massive deficit cost could be cuts to Medicare and Medicaid, which often show up in GOP crosshairs. Neither the House nor Senate bill contains specific provisions cutting these programs, but such cuts could appear in a final bill or as part of a larger federal budget bill.
Despite these difficulties, Republicans seem likely to get something passed. Unlike their efforts thus far to repeal the ACA, Republicans are more unified in their approach to tax reform, and they are under heavy pressure to claim a landmark achievement before the end of the year.