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Obamacare Tax Cuts Won't Help Tax Reform Baseline

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Obamacare Tax Cuts Won't Help Tax Reform Baseline

May 19, 2017

Republicans frequently claim that eliminating Obamacare taxes as part of health insurance reform will make future tax reform legislation easier by “lowering the tax baseline.”

The theory seems intuitive at first. Over the next decade, Washington is projected to collect $43.1 trillion in tax revenues. Thus, tax reformers seeking revenue-neutrality must design a system raising $43.1 trillion. But if Congress first repeals ObamaCare’s $600 billion in taxes (without revenue offsets), it would lower the baseline to $42.5 trillion – and put future tax reformers on the hook for $600 billion less in revenue.

This misguided baseline assumption has been a fixture of health and tax reform discussions. 

On the right, congressional tax reformers have proposed passing the American Health Care Act first in order to “fix the tax reform baseline.” Reason Magazine editor Peter Suderman recently declared in the New York Times that this baseline maneuver – rather than health care reform – must be Congress’ real motivation for repealing ObamaCare. 

On the left, Slate complained that the baseline maneuver would “give leaders about $1 trillion to work with in the tax reform package."  No matter that tax reform would repeal only $600 billion in Obamacare taxes, not health coverage provisions that happen to affect other revenues. 

Yet this assumption is absolutely, mathematically incorrect. While cutting Obamacare taxes would lower the revenue baseline, it would not change the composition of tax reform.

The reason is simple: Congress’ tax reform proposals do not address Obamacare taxes. So taking these taxes off the table does not free up additional money.

Cutting corporate or individual tax rates by $2 trillion in a revenue-neutral manner will require $2 trillion in offsetting revenue-raisers. And because Congress’ tax reform proposals contain no significant Obamacare tax cuts (lawmakers are instead targeting the individual and corporate tax codes), Obamacare’s status is irrelevant to these calculations.

Had tax reformers already assigned $600 billion in revenue-raisers to pay for Obamacare tax repeal, then passing health reform first would free up those offsets to pay for new tax cuts. But since these Obamacare tax cuts were never included (and offset) in the first place, there is nothing to substitute out for new tax cuts.

This does not mean tax reformers should regret excluding a revenue-neutral Obamacare tax repeal from their original tax reform proposals. Making room for repeal would have first required removing a different $600 billion tax cut provision (which would then be added back after the Obamacare tax cuts are removed from the bill). It would all even out.

If Congress were to fully commit to eliminating Obamacare taxes without revenue offsets, then it does not matter which bill includes the reforms. It becomes a stand-alone $600 billion tax cut with no corresponding offsets or trade-offs.

Some point back to the reduction in the baseline from $43.1 trillion to $42.5 trillion. However, the $600 billion Obamacare tax cut would consume the full $600 billion baseline reduction. It would not allow tax reformers to cut more taxes later. That would be double-counting.

Put differently, tax reformers will be given either: A) a $43.1 trillion revenue baseline with instructions not to touch $600 billion in Obamacare taxes that are reserved for later repeal, or B) a $42.5 trillion revenue baseline after the Obamacare taxes have been repealed. Either way, Congress is still reforming the same $42.5 trillion pot of non-Obamacare tax revenue. Reforming health care first does not matter to tax reform.

The baseline immediately adjusts.  The baseline is $600 billion lower, but that was all consumed by the $600 billion ObamaCare tax cut.  Congress cannot do another tax cut on top of that while maintaining revenue-neutrality.

Obamacare taxes will affect tax reform only if lawmakers abandon health reform and decide to repeal Obamacare taxes within tax reform – and then add $600 billion in new revenue offsets to keep the new provision revenue-neutral. In that extraordinarily unlikely scenario, tax reformers would be forced to fill a $43.1 trillion revenue pot without any underlying Obamacare revenues.

Of course, baselines and revenue-neutrality matter only to the extent that Congress intends to pay fully for tax reform. Most proposals fail this test.

The Committee for a Responsible Federal Budget has aggressively pushed back on this baseline myth, yet it continues to gain currency in Congress and the media. Lawmakers seeking to eliminate the ObamaCare’s $600 billion in taxes should not concern themselves with the baseline effect of repeal. It will not make tax reform any easier.

Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on twitter @Brian_Riedl.

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