TAX NEWS - January 2010

House-Senate health care negotiations continue as leaders waive formal conference

Although the new session Congress does not begin until later this month, lead negotiators in both the House and Senate have cut their vacations short to continue behind-the-scenes efforts to arrive at a compromise on health care reform legislation.

Lawmakers have announced that they will avoid a formal conference committee, opting instead to pursue informal discussions to reach an agreement, followed by a process known as "ping-ponging" to move a final bill between the two chambers.

In its simplest form, ping-ponging would allow the House to take up the health care bill approved by the Senate on Christmas Eve, substitute the text of the negotiated compromise agreement, vote it out of the chamber, and send the amended bill back to the Senate for debate and a final floor vote. (In the unlikely event that either chamber attempted to make significant changes to the agreement, the process could become more complicated.)

Ping-ponging provides a significant advantage for the majority party in that it cuts down the number of procedural votes necessary on the Senate floor and minimizes potential opportunities for the minority party to hold up legislation.


Getting to 'yes'

President Obama held a closed-door session with House committee chairmen with jurisdiction over the bill, as well as Speaker Nancy Pelosi, D-Calif., on January 6. It is generally expected that the final agreement will hew more closely to the Senate version of the bill, given the difficulty that chamber has had in holding together the Democratic caucus and securing the 60 votes needed to overcome Republican filibuster threats. House Ways and Means Chairman Charles Rangel, D-N.Y., cautioned, however, that attaining a majority vote in the House should not be taken for granted. (The House bill was approved by a margin of only five votes.)

Although nontax issues will likely dominate negotiations, the disparities in how the two chambers have funded their respective bills through taxes will also need to be resolved. The House bill, which was approved November 7, raises $560 billion in taxes over 10 years. The largest piece of this, $461 billon, comes from a proposed 5.4 percent surtax on modified adjusted gross income (AGI) over $500,000 a year for individuals and modified AGI over $1 million for couples. In contrast, the Senate bill raises approximately $400 billion, chiefly through an excise tax on "Cadillac" insurance plans ($149 billion), specified industry fees ($101 billion), and an increase in the hospital insurance tax on high-income individuals ($87 billion).

Negotiators likely will begin discussing the tax package once they have agreed on provisions for expanding insurance coverage, determined the net cost of those provisions, and agreed on how much revenue they will need to raise to cover the expected shortfall (after spending cuts and other cost-saving measures are taken into account).

Once there is a consensus on their revenue target, negotiating a funding solution will involve acting on five broad categories of revenue-raising provisions.


Areas of general agreement – First, for revenue purposes, both bills are substantially the same with respect to provisions that would:

- Eliminate deduction of expenses allocable to the Medicare Part D subsidy;
- Impose fees or taxes on medical device manufacturers;
- Conform the definition of medical expenses for various purposes;
- Limit flexible spending account contributions;
- Increase the penalty on disqualified medical account distributions;
- Fund comparative effectiveness or outcomes research; and
- Impose information reporting on business payments made to corporations.

These provisions, which raise roughly $64 billion, are likely to be in the final legislation. Taxpayers affected by these changes should consider preliminary planning for their implementation.


Industry fees – Second, the Senate would impose $82 billion of fees on pharmaceutical manufacturers and health insurance providers that are similar to its fees on medical device manufacturers. For its part, the House bill would impose a tax on the sale of certain medical devices but does not call for annual fees on pharmaceutical manufacturers or health insurance providers. House negotiators will have to determine whether, or to what extent, they will accede to these other industry fees.


Taxes on high-income individuals – Third, each chamber would tax high-income individuals to fund part of the reform effort, albeit in very different ways. While negotiators are likely to include some form of an additional tax on high-income taxpayers, they will need to agree on:

- The total amount of tax to be raised from high-income individuals;
- The definition of "high income"; and
- Whether to tax all income including investment income or only wage and self-employment income.

High-income individuals are already thinking about strategies to accelerate income into 2010 and defer deductions into 2011 in response to likely increases in tax rates as the 2001 and 2003 tax cuts expire. In analyzing the costs and benefits of such strategies, they will want to factor into their planning the likelihood of an additional tax increase.


Health care revenue provisions – The fourth category of revenue issues encompasses five health care-related provisions in the Senate bill. The two largest are the tax on high-cost plans and an increase in the threshold for deducting itemized medical expenses. Although proponents of these measures see them as supporting efforts to control medical costs, opponents regard them as having a direct impact on a significant number of taxpayers who do not fall within any definition of high income. These conflicting views may be the most difficult for negotiators to resolve.


Non-health care provisions – Finally, the House bill contains a collection of miscellaneous revenue raisers that are not germane to health care reform. These provisions, to the extent they are relatively noncontroversial in the eyes of the Senate, could find their way into a compromise agreement if resolution of the larger issues leaves a modest shortfall in needed revenues.


Timing

House Speaker Pelosi said January 6 that negotiators are close to reaching a compromise agreement on a bill, although she refused to predict when the legislation might reach the House and Senate floors.

The House is scheduled to reconvene on January 12 while the Senate does not plan to return to Washington until January 19. Some lawmakers have expressed a desire to send a completed bill to the President's desk by the State of the Union address, which typically occurs in late January.