The GOP’s Big Tax Dilemma: Repealing Obamacare Taxes
Policy + Politics

The GOP’s Big Tax Dilemma: Repealing Obamacare Taxes

REUTERS/Gary Cameron

As if they aren’t perplexed enough over how to repeal the Affordable Care Act and replace it with a plan that avoids stripping millions of Americans of their health insurance, congressional Republicans are sharply divided over whether to repeal hundreds of billions of dollars’ of Obamacare taxes.

Here’s the problem: Any replacement program will cost a lot of money, maybe even more than Obamacare’s $1.2 trillion price tag over ten years. So if the ACA and all of its mandates are repealed, the GOP will have to raise taxes.

Related: Republicans Are Having Second Thoughts About Scrapping Obamacare Taxes 

On the far right, Rep. Jim Jordan (R-OH), the former chair of the conservative House Freedom Caucus, said last week that Congress and the administration must abandon any thoughts of “repairing” Obamacare and move ahead to fully repeal the program -- including the taxes that have been used to finance it the past four years. “I would argue Obamacare is so bad, you got to get rid of every single bit of it,” he told Fox News. “Every tax, every regulation, every mandate.”

But more moderate or pragmatic Republicans dismiss Jordan’s approach as foolhardy and reckless, and one that would deny their party sufficient resources to keep Obamacare operating throughout a lengthy transition period while bringing a new GOP health care system on-line. “These are sources of revenue you just can’t discount,” Rep. Patrick Meehan (R-PA), a member of the centrist House Tuesday Group, told the Associated Press. Meehan said that the money could help create “a soft landing and coverage for those who currently rely on Obamacare.”

Senate Majority Whip John Cornyn (R-TX), has seconded that argument, noting that “Whatever we do in replacement is going to cost some money,” in the form of tax revenue or deep offsetting cuts in other areas of the budget.

Related: The Potential Cost of Obamacare Repeal: 32 Million Without Insurance

For years, Republicans have targeted the Democratic-imposed tax increases as a ripe target for demolition. The Obamacare taxes are a combination of Medicare tax increases and additional federal and state taxes aimed primarily at high-income earners.  When the Democratic-controlled Congress passed the ACA in 2010, it required hospitals, the health insurance industry, medical device manufacturers and pharmaceutical companies to help finance the program because of the huge profits they would likely accrue from millions of new paying customers.

Republican critics of Obamacare have long denounced those additional taxes – especially the 2.3 percent medical devices tax, a 10 percent tax on indoor tanning services, and taxes on brand-name drugs and health insurance companies selling policies on and off the government exchanges as harmful to businesses. They have also sharply criticized two other Obamacare tax hikes on the earnings and investments of high-income earners making more than $250,000 a year.

But there is compelling evidence that if the Republicans choose to move ahead and scrap all the existing taxes hikes as part of an overall repeal of Obamacare, they will simply not have enough revenue to finance a replacement plan that comes anywhere close to insuring the 20 million Americans who currently benefit from Obamacare. Those insured include about 9 million through the exchanges, or about 2.8 percent of the population, and another 10 million through expanded Medicaid.

Related: The GOP’s ‘Repeal and Replace’ Obamacare Is Becoming ‘Repair and Fix’

After claiming at one time they could repeal and replace Obamacare this year almost overnight, President Trump and his Republican allies on Capitol Hill are currently on the defensive. They face searing complaints from insurers, the health care industry, consumer groups, Republican governors and Democratic protesters about the growing chaos in the health care markets and the GOP’s inability to produce a credible alternative.

The New York Times reported Sunday that the Trump administration and congressional Republicans are urgently seeking ways to “shore up” the Obamacare insurance markets and prevent more insurers from pulling out amid the growing uncertainty and instability triggered by the GOP pledge to dismantle the system. One of those measures would provide billions of dollars more to the insurance companies to subsidize out-of-pocket costs and deductibles for millions of lower-income consumers.

Regardless of what approach the Republicans ultimately take – whether a total repeal and replacement of Obamacare phased in over a lengthy transition period or some variation of Obamacare that preserves its most popular provisions while adding more conservative, market-based features – Republicans will need a lot of money to make that happen.

The Congressional Budget Office has estimated that the existing Obamacare taxes would generate about $1.1 trillion in revenues between 2016 and 2025 without any changes. A Brookings Institution analysis released in late December estimates that only 40 percent of the $1.2 trillion cost of the ACA’s expansion from 2019 to 2026 would be available to Congress and the White House  if the taxes were repealed.

Related: Why ‘Repeal and Delay’ of Obamacare Could Send Premiums Soaring Next Year

The Republicans could generate as much as $850 billion of the total needed through a number of budgetary and tax maneuvers, including the use of “dynamic” budget scoring to claim $200 billion of new revenues through economic expansion. There has also been talk of capping the tax exclusion for employer-provided health insurance to pick up another $100 billion or so, although there isn’t a lot of support for that.

What’s more, if Trump were to break a campaign pledge not to cut spending on Medicare as part of the GOP effort to replace Obamacare, he likely would trigger a massive backlash from the Democrats, the AARP and other seniors’ advocates.

“Obviously they are stuck in a dilemma,” Paul Ginsburg, director of the Brookings Center for Health Policy, said in an email today. “Basically, if you repeal all the ACA taxes, which Republicans have long wanted to do, then you are only left with 40 percent of the cost of the coverage expansion in order to pay for a replacement. Once you get rid of all of the taxes and all of the coverage provisions, you’re left with only about $500 billion in your pocket.”