Providers, including charitable hospitals, nonprofit organizations, and academic medical centers, should watch for possible policy changes in the tax reform bill reconciliation process.
Within a span of just five weeks, both the US House of Representatives and the US Senate passed their own versions of the tax reform bill, or the “Tax Cuts and Jobs Act.” If a final bill is passed, this tax reform legislation will constitute the first significant overhaul of the tax code in more than a generation. Given that nearly 18% of the gross domestic product is spent on healthcare, it is no surprise that healthcare has taken on some prominence in the rewriting of the tax code. As we wait for the House and Senate to reconcile and meld their respective versions into a single bill, here are six issues healthcare providers should watch for in the tax reform bill reconciliation process:
- Tax-exempt Municipal Bond Financing. Charitable hospitals and nonprofit organizations have voiced concern over two provisions in the tax legislation affecting private activity bonds and advanced refunding of bonds. The first provision in the House bill would repeal the tax exemption for private activity bonds issued after January 1, 2018. The second provision in both the Senate and House bills would repeal the exclusion from gross income on the advance refunding of bonds. Both provisions would not only increase the cost of borrowing for many charitable hospitals and nonprofit organizations but also significantly impact investment in their communities including building infrastructure, purchasing technology, and funding growth. A coalition of 35 national organizations including the American Hospital Association recently urged Congress to “protect in full” the current tax treatment of private activity bonds and to delay the effective date of the advance refunding provision to December 31, 2018 or limit it to bonds issued after December 31, 2017.
- Charitable Deductions. With the standard deduction poised to nearly double under the House and Senate tax bills, many charitable hospitals and nonprofit organizations are concerned that this policy change may precipitate a steep decline in personal giving that could harm patients and jeopardize the hospitals’ and nonprofits’ mission. Only 30% of Americans currently itemize their taxes according to the Tax Policy Center, which projects that the number of itemizing filers would drop to 5% as the standard deduction becomes greater than the itemized deductions of most tax filers. Estimates by the Joint Committee on Taxation further project that an expanded standard deduction could result in a $95 billion decline in the value of charitable deductions claimed on tax returns in 2018.
- Medical Expense Deduction. While the House tax bill would eliminate the medical expense deduction, the Senate bill would retain the deduction and temporarily expand it for tax years 2017 and 2018 by lowering the current threshold for qualifying from 10% of adjusted gross income to 7.5%. Notably, nearly three-quarters of tax filers using this deduction are age 50 or older and live with a chronic condition or illness according to the AARP, which says the policy change “amounts to a health tax on millions of Americans with high medical costs.”
- The Individual Mandate. The Senate tax bill would ax the individual mandate by paring down the penalty for noncompliance to zero. The Congressional Budget Office projects this policy change could raise premiums an additional 10% per year and add 13 million people to the ranks of the uninsured. The House tax bill does not contain a similar provision.
- Medical and Scientific Education. A House bill provision to eliminate the deduction of student loan interest would disproportionately impact young doctors according to data from the Association of American Medical Colleges, which shows increasing numbers of recent medical school graduates with student loan debt of $200,000 or more. A second provision that would tax as income the tuition waivers graduate students receive for teaching and research is projected to add to the cost of obtaining a medical or science degree and could put a career in these fields out of reach for many in the future. The Senate bill does not contain similar provisions.
- Federally Mandated Cuts to Medicare. The tax legislation does not specifically provide for reductions to the Medicare program. However, a measure mandating cuts to federal programs under the statutory Pay-As-You-Go-Act of 2010 (PAYGO) could be triggered when the tax legislation—which proposes to increase the federal deficit by $1.5 trillion over 10 years—becomes law unless Congress waives the cuts under a bipartisan agreement. Reductions to the Medicare program, while limited to 4%, would nonetheless result in an automatic $25 billion reduction to program funding in fiscal year 2018. Budget analysts project that the impact of the federally mandated cuts would be felt in the immediate reduction of payments to physicians and providers. Such cuts have been waived by Congress in the past and House and Senate leaders have already stated their intention to waive them again this time. However, in order to get to the necessary 60 votes in the Senate, such action will necessitate agreement by the Democrats.