The tax bill unveiled by House Republicans on Thursday would not, as had been rumored, eliminate the tax penalty for failure to have health insurance. But it would eliminate a decades-old deduction for people with very high medical costs.
The controversial bill is an effort by Republicans to revamp the nation’s tax code and provide dramatic tax cuts for business and individuals. However, its future is not yet clear because Republicans, who control both the House and Senate, appear divided on key measures.
The medical deduction, created in World War II, is available only to taxpayers whose expenses are above 10% of their adjusted gross income.
Because of that threshold, and because it is available only to people who itemize their deductions, the medical expense deduction is not used by many people — an estimated 8.8 million claimed it on their 2015 taxes, according to the IRS.
But those 8.8 million tax filers claimed an estimated $87 billion in deductions, meaning that those who do qualify for the deduction have very high out-of-pocket health costs.
“For many people, this is a big deduction,” said David Certner, legislative counsel for AARP, which opposes the change.
Sen. Ron Wyden (D-Ore.), ranking member of the tax-writing Senate Finance Committee, called the bill’s elimination of the medical expense deduction “anti-senior.”
But defenders of the bill say the elimination of the deduction should not be seen in isolation.
In an FAQ posted on the House Ways and Means Committee website, the bill’s sponsors denied that the change would “be a financial burden.”
Getting rid of many current deductions “is being done to finance rate cuts and increase the standard deduction and child tax credit,” said Nicole Kaeding, an economist with the business-backed Tax Foundation. So for many tax filers, she said, “there will likely be offsetting tax cuts.”
On the other hand, those offsetting cuts almost by definition will not make up the difference for people with very large medical expenses, who are the only ones who qualify for the medical deduction.
“That’s why tax reform is hard,” Kaeding said.
Sen. Tom Cotton (R-Ark.) is continuing to push language to add to the bill that would eliminate the penalty. President Trump has added his endorsement via Twitter: “Wouldn’t it be great to Repeal the very unfair and unpopular Individual Mandate in ObamaCare and use those savings for further Tax Cuts,” he wrote Wednesday.
But while the president is correct that there would be savings from eliminating the mandate, the Congressional Budget Office has also estimated that millions more Americans would become uninsured as a result.