Our nation is on an unsustainable fiscal course. The three major entitlements – Social Security, Medicare, and Medicaid – alone are set to eclipse historical tax levels by 2052 and a realistic assessment of the Congressional Budget Office baseline shows the government piling on an additional $13 trillion over the next ten years.
The time for pointing out the existence of a problem is over. Both Democrats and Republicans now agree entitlement reform must be a top priority. The question now is what exactly the inevitable reform will include. Specifically, does Congress drastically raise taxes and allow spending to skyrocket or do they maintain spending and revenue at historical levels?
This afternoon Congressman Paul Ryan (R-WI), along with several other House Republicans, held a press conference presenting the updated “Roadmap for America’s Future.” The bill, introduced today, would return the nation to a sustainable fiscal path without raising taxes. The proposal, which has been scored by the non-partisan Congressional Budget Office accomplishes this by focusing on four specific areas for reform:
First, the Roadmap would give universal access to health care by providing a substantial tax credit to enable individuals to purchase their own insurance, allowing for the purchase of insurance across state lines and creating state-based high risk pools to provide those with pre-existing conditions affordable health care options.
Second, the bill would reform Medicare specifically focusing on preserving existing benefits for those over 55 and ensuring future generations of elderly citizens have access to affordable care. Fully funding Medical Savings Accounts for low income beneficiaries, and creating a Medicare payment of $11,000 to purchase Medicare approved plans would contain costs and ensure coverage for generations to come.
Third, the legislation would put Social Security spending on a sustainable course by offering citizens the choice to invest in personal retirement accounts comparable to the Thrift Savings Account used by federal employees. This in combination with slightly increasing the retirement age will finally set Social Security on a sustainable path.
Finally, the bill would reform the tax code by implementing a simple two tier tax system. Individuals with income up to $50,000 and households with income up $100,000 would pay 10 percent. Those with higher income would pay 25 percent. The Roadmap also eliminates the alternative minimum tax, the death tax and the corporate income tax. The corporate income tax, which is currently the second highest in the world, is replaced with an 8.5 percent business consumption tax.
These bold reforms mark an important departure from the Washington norm of ignoring the looming fiscal crisis. In the past politicians avoided entitlement reform in an effort to steer clear of a potential political backlash. Congressman Ryan’s Roadmap confronts entitlement reform head on and proves Congress does have the option to return the nation to a fiscally sustainable course without increasing taxes.
One of the key issues the White House, House, and Senate will be negotiating behind closed doors, is how to pay for President Obama’s $2.5 trillion plan. Reconciling the differences between these two bills will remain a difficult task for legislators particularly as they rely on a different mix of revenue-generators. The following two lists include key revenue-generating mechanisms in both the House and Senate bills as reported by Tax Notes.
House-passed Affordable Health Care for America Act (H.R. 3962):
- $460.5 billion over 10 years from a 5.4 percent Surtax on individuals making more than $500,000 and families earning more than $1 million (begins 2011)
- $135 billion as part of an 8 percent tax of a firm’s payroll ($750,000 or more) and a lower rate if firm payroll is between $500,000 $749,999 (begins 2013)
- $33 billion as part of a 2.5 tax on modified adjusted gross income (AGI) for those individuals that do fail to secure “acceptable” health coverage (begins 2014)
- $20 billion from a 2.5 percent excise tax on medical devices (begins 2013)
- $17.1 billion in corporate information reporting requirements (applies to payments made after December 31, 2011)
- $13.3 billion from a cap on Flexible Spending Accounts (FSAs) at $2,500 and indexed forward to the CPI-U (begins 2011; currently there is no cap)
- $7.5 billion for the limitation of tax treaty benefits related to U.S. withholding tax imposed on deductible related-party payments
- $6 billion from a “worldwide interest allocation” repeal (begins 2011)
- $5.7 billion as a result of codifying the economic substance doctrine and imposing penalties on underpayments
- $5 billion for reforming the definition of medical expenses under FSAs, health savings accounts, Archer Medical Savings Accounts, and health reimbursement arrangements, including the exemption of over-the-counter medications prescribed by a doctor (begins 2011)
- $2.2 billion as part of an end to the Medicare Part D subsidy (begins 2013)
Senate-passed Patient Protection and Affordable Health Care Act (H.R. 3590):
- $148.9 billion as part of a 40 percent nondeductible excise tax on insurance plans of more than $8,500 for individuals and $23,000 for families and indexed to the CPI-U plus 1 percentage point (begins 2013)
- $101 billion in yearly nondeductible fees on manufacturers and importers of pharmaceuticals (begins 2010), on manufacturers and importers of medical devices (begins 2011), and health insurance providers (begins 2011)
- $86.8 billion as part of Medicare Payroll tax increase from 1.45 to 2.35 percent for individuals with wages of more than $200,000 and $250,000 for joint filers (begins 2013)
- $28 billion from employer penalties on full-time workers that receive subsidies to purchase coverage through new insurance exchanges
- $17.1 billion in corporate information reporting requirements (applies to payments made after December 31, 2011)
- $15.2 billion from an increase in the floor for deductible medical expenses from 7.5 percent of AGI to 10 percent of AGI and a “carve-out” for those older than 65
- $15 billion in tax penalties on individuals who fail to secure “qualified” health coverage (begins 2014)
- $13.3 billion from a cap on Flexible Spending Accounts (FSAs) at $2,500 and indexed forward to the CPI-U (begins 2011; currently there is no cap)
- $5.4 billion as part of an end to the Medicare Part D subsidy (begins 2011)
- $5 billion for reforming the definition of medical expenses under FSAs, health savings accounts, Archer Medical Savings Accounts, and health reimbursement arrangements, including the exemption of over-the-counter medications prescribed by a doctor (begins 2011)
The House- and Senate-passed bills clearly deviate from one another on the types of revenue-generating mechanisms included to maintain at least a “deficit-neutral” CBO score. The House bill relies punitively on both a surtax on high-income individuals as well as employers (even reaching small businesses). Alternatively, the Senate bill predominantly relies largely on a Medicare payroll tax on high-income individuals, fees on pharmaceutical medical device and health insurance providers, as well as an excise tax on high-value health insurance plans.
It is unclear, and will likely remain unclear until a final bill is passed, regarding the exact mix of revenue-generating mechanisms included to finance a final health care reform bill. What is clear, however, is that American individuals and businesses should begin bracing now for higher taxes—they are coming in one form or another!