The tax legislation presented by House Republicans on Thursday will, contrary to rumors, retain the tax penalty for not having health insurance. However, it will abolish a long-standing deduction available for individuals with exceptionally high medical expenses.
This contentious bill aims to overhaul the nation’s tax framework and offer significant tax reductions for both businesses and individuals. Nevertheless, its trajectory remains uncertain as Republicans who control both the House and Senate seem to be divided on several crucial issues.
The medical deduction, established during World War II, is accessible only to those whose medical costs exceed 10% of their adjusted gross income.
Due to this threshold and the requirement for taxpayers to itemize their deductions, this medical expense deduction is claimed by a limited number of taxpayers—approximately 8.8 million reported using it on their 2015 tax filings, according to the IRS.
Related: What the House tax bill means for taxpayers
These 8.8 million tax filers, however, claimed around $87 billion in deductions, suggesting that those eligible for the deduction face considerable out-of-pocket health expenses.
“For many individuals, this represents a significant deduction,” commented David Certner, legislative counsel for AARP, which opposes this legislative change.
AARP has determined that about 75% of those who utilize the medical expense deduction are aged 50 and older, and over 70% earn $75,000 or less per year.
Many of these medical expenses are related to long-term care, which is usually not covered by health insurance. Such care can accrue costs in the thousands, or even tens of thousands, of dollars annually.
Senator Ron Wyden, a Democrat from Oregon and a senior member of the Senate Finance Committee, criticized the elimination of the medical expense deduction as “anti-senior.”
Conversely, proponents of the bill argue that this cut should not be viewed independently.
The House tax bill also aims to revoke billions of dollars in corporate tax credits that have significantly supported the flourishing “orphan drug” sector.
In a FAQ published on the House Ways and Means Committee’s website, supporters of the bill claimed that the alteration would “not impose a financial strain.”
“Our legislation lowers tax rates and raises the standard deduction, allowing people to retain more of their earnings immediately, rather than relying on complex provisions that many won’t utilize, or may only use once in their lifetime,” stated the sponsors.
Eliminating various current deductions “is necessary to fund rate reductions and enhance the standard deduction and child tax credit,” explained Nicole Kaeding, an economist with the Tax Foundation, which is backed by business interests. Consequently, for many taxpayers, she said, “offsetting tax reductions are likely.”
Nevertheless, those offsetting reductions will inherently fail to fully compensate people with extremely high medical expenses—those who solely qualify for the medical deduction.
“That’s why tax reform is complicated,” noted Kaeding.
Related: Powerful organizations oppose the GOP tax proposal
Notably absent from the bill—at least for the moment—is any mention of rescinding the tax penalty for failing to maintain health insurance. The so-called individual mandate is one of the least favored components of the Affordable Care Act, which Republicans attempted and failed to amend or abolish earlier this year.
Senator Tom Cotton, a Republican from Arkansas, continues to advocate for the insertion of measures in the bill to abolish the penalty. President Donald Trump voiced his support via Twitter: “Wouldn’t it be great to repeal the very unfair and unpopular Individual Mandate in ObamaCare and utilize those savings for additional tax cuts,” he posted on Wednesday.
However, while the president is correct that abolishing the mandate would lead to savings, the Congressional Budget Office has estimated that millions more Americans may become uninsured as a result.
Kaiser Health News, an independent health news organization whose articles appear in various media outlets nationwide, is an editorially autonomous segment of the Kaiser Family Foundation.
