us tax: Baucus releases updated health care draft; hikes excise tax rates on Cadillac plans

Senate Finance Committee Chairman Max Baucus, D-Mont., released a revised version of his comprehensive health care reform proposal September 22, including changes to the excise tax on so-called "Cadillac" insurance plans – the key provision in the revenue package – and a new provision that would modify the individual itemized deduction for medical expenses.

The revised mark generally would increase excise tax rates on Cadillac group health plans, but also would soften the impact of the tax by raising the policy-value thresholds for plans covering retirees and workers in certain high-risk professions and by changing the rules for indexing the threshold. A significant new revenue raiser would increase the threshold for claiming the individual itemized deduction for medical expenses. Other changes would make health care more affordable for lowand middle-income individuals and reduce penalties for persons who do not participate in a health insurance program.

Release of the revised mark, which builds on the proposal Baucus unveiled last week, coincides with the first day of the Finance Committee's formal mark-up of a health care bill. According to Baucus, the new draft incorporates several amendments proposed by Democratic and Republican taxwriters, with the goal of allaying their concerns and moving closer to a bill that can muster a filibuster-proof majority on the Senate floor.

The first day of the hearing was devoted to member statements and a "walk through" of the new draft. Finance Committee members are expected to begin offering additional amendments starting September 23.


Changes to Cadillac plans and other existing revenue provisions

The revised chairman's mark would increase the excise tax rate on Cadillac health plans to 40 percent (from 35 percent). The tax would be levied on insurance companies based on the aggregate value of employer-sponsored health coverage that exceeds $8,000 for individuals and $21,000 for families, effective for tax years beginning after December 31, 2012.

Although the base threshold amounts are unchanged from the original proposal, the revised mark would increase the thresholds for policies covering retirees over age 55 and individuals employed in certain "high-risk" professions to $8,750 for singles and $23,000 for families.

The revised proposal would index all threshold amounts to the Consumer Price Index for Urban Consumers (CPI-U) plus 1 percent beginning in 2014. (Under the original proposal, the threshold was pegged strictly to the CPI-U.) The Joint Committee on Taxation (JCT) staff estimates that the modified provision would raise $205 billion, roughly $11 billion less than the initial chairman's mark.

Flexible spending arrangements – The modified bill would impose a limit of $2,500 per taxable year on employee salary reductions for coverage under a cafeteria plan flexible spending arrangement, effective for years beginning after December 31, 2010. It would not apply to health reimbursement arrangements. The initial mark included a $2,000 limit and was applicable for years beginning after December 31, 2012. The revised mark would raise $14.6 billion over 10 years (down from $16.5 billion in the original version).

Health savings accounts – Under the revised bill, the increased penalty for nonqualified health savings account distributions would be effective for distributions made during taxable years beginning after December 31, 2010 (originally December 31, 2009). The revision would not alter the 10-year revenue estimate of $1.3 billion.

Fee on health insurance providers – The revised bill would increase the annual fee on health insurance providers to $6.7 billion per year (from $6 billion). The revised provision would raise $45.3 billion over 10 years, an increase of $4.8 billion over the original proposal.

Fee on clinical laboratories – The revised chairman's mark eliminates the proposed fees on clinical laboratories. Individual mandate – Under the revised bill, the maximum penalty assessed against individuals who fail to purchase health insurance would be $1,900 per family per year. (The original chairman's mark capped the penalty at $3,800 per family per year.) This provision was not scored by the JCT.


New provisions

Itemized deduction for medical expenses – The revised draft would increase the adjusted gross income (AGI) threshold for claiming the itemized deduction for medical expenses from 7.5 percent of AGI to 10 percent for regular income tax purposes. The proposal does not change the alternative minimum tax treatment of the deduction. The proposal would be effective for taxable years beginning after December 31, 2012, and would raise $21.7 billion over 10 years.

Small Business Health Care Affordability Tax Credit – The modified chairman's mark incorporates an amendment that would allow nonprofit companies to take advantage of the Small Business Health Care Affordability Tax Credit. In 2011 and 2012, eligible nonprofits that contribute to the cost of health care coverage for their employees could receive a credit for up to 25 percent of their contribution. Once the health insurance exchanges are operating in 2013, qualified nonprofits purchasing insurance through the exchanges could receive a tax credit for two years that covers up to 35 percent of their contribution. The new provision would cost $2.1 billion over 10 years.

Indian tribe health benefits – The modified chairman's mark would allow Native Americans to exclude the value of specified Indian tribe health benefits from gross income for tax purposes. According to the JCT, the new provision would cost less than $50 million over 10 years.


Further amendments to be offered this week

Finance Committee members have submitted over 500 amendments to the draft bill. Of these, approximately 100 address financing provisions, including alterations to the excise tax on Cadillac insurance plans. Although some have already been incorporated into Baucus's revised proposal, taxwriters will have an opportunity to offer further amendments throughout the course of the mark-up.

The committee is expected to address provisions dealing with reforming the health care delivery system first, followed by provisions on ways to expand health care coverage. Financing comprehensive health care reform, the portion of the bill that includes tax provision, will be taken up later in the process.

Senate Majority Leader Harry Reid, D-Nev., said September 21 that he hopes to bring the committee-approved health care bill to the Senate floor for consideration during the week of September 28. Given the number of amendments the committee will have to consider plus the time it will take to merge the Finance Committee bill and the Health, Education, Labor, and Pensions Committee proposal into a single package; it is unclear if lawmakers will be able to meet that deadline.