Big News on Tax Reform

by Robert VerBruggen

A Washington Post reporter tweets:

SFC is the Senate Finance Committee. This is huge. Let’s unpack.

First, as scored by the CBO, repealing the individual mandate will save the government money, meaning it will free up funds for tax cuts. (When fewer people sign up for plans, fewer people get government subsidies.) The risk is that people will wait until they’re sick to sign up for coverage, which they can do because the rules on preexisting conditions will still be in effect. This drives up premiums and causes even more people to drop out of the market, in extreme cases setting off the dreaded “death spiral.” The CBO’s best guess is that, thanks to the law’s subsidies, enough healthy people will still sign up to keep the market stable — but this remains a gamble and will almost certainly raise premiums significantly. Hopefully Republicans will work in some kind of alternative to the mandate to prevent abuse.

Second, “Alexander-Murray” refers to the bipartisan health-care bill rolled out last month. It would fund the “cost-sharing reduction” subsidies that Trump has cut off (which I discussed here) with some additional flexibility for states to experiment with new health-care policies. Many conservatives disliked the bill by itself, but it’s not a bad price to pay for something bigger they want, like mandate repeal. 

My biggest fears are that the above combination of policies (A) would destabilize the individual health-insurance market and (B) would allow Republicans to cut taxes even more than they already plan to ($1.5 trillion over ten years) without doing much to offset the revenue loss. As I spelled out last week, tax cuts paid for with deficit spending are a risky endeavor, as there’s a plausible argument that the deficits will cancel out any economic growth resulting from the tax cuts. And as the CBO is in the middle of revising its analysis of the individual mandate, we shouldn’t be too confident we’ll actually see the $338 billion in deficit reduction promised in its current score. “The preliminary results of analysis using revised methods indicates that the estimated effects on the budget and health insurance coverage would probably be smaller than the numbers reported in this document,” it said last week.

In other news, the CBO pointed out today that under “pay-as-you-go” rules, increasing the deficit through tax cuts would lead to automatic cuts in Medicare and other programs. Congress could waive the rules after passing the tax cuts, but this would require Democratic support.

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