November 22, 2017 Federal Policy Update
Taxes and Aging: What’s the Connection?
Implications of Current Tax Cut Proposals on Aging Programs, Older Adults and Caregivers
House and Senate Members are in their districts and states this week for the Thanksgiving weekend, and in last week’s Advocacy Alert, n4a encouraged aging advocates to use the recess as an opportunity to connect with your lawmakers locally in opposition to the tax proposals that are currently speeding through Congress.
As n4a’s recent Alert details, our primary concern with the existing House and Senate tax proposals is that they would drive up the federal deficit by at least $1.5 trillion, which means lawmakers could pass deep spending cuts in the near future as a way to “offset” deficit increases. We also know that this strategy isn’t solely conjecture—House and Senate Budget Committee leaders have expressed their intent to call for significant spending cuts as soon as next year to federal health care and social services programs to offset the deficit increases resulting from tax cuts. (To see the details of those proposed cuts, revisit n4a’s October 27 Legislative Update on the FY 2018 budget resolution.)
Last week, n4a CEO Sandy Markwood released a statement outlining n4a’s grave concerns with the measures due to their direct effect on the federal deficit and indirect threat to key federal programs. This approach will undermine critical programs and supports necessary to ensure the safety and security of America’s older adults, caregivers and their families at a time when our nation is aging rapidly and services are increasingly necessary.
In addition to broad budgetary implications, the tax proposals advancing through the House and Senate would also directly affect millions of low and moderate-income older adults, and the local AAAs and other CBOs that serve them. n4a encourages aging advocates to continue outreach to oppose threats to federal aging and health care programs that could result from a tax cut bill. While not exhaustive, what follows are summaries of key sections of the bills that we believe would affect older adults and aging programs.
What’s in the House and Senate Tax Bills and How Could These Policies Affect Older Adults?
Although the House and the Senate are quickly advancing different legislative strategies to significantly cut taxes, both bills would decrease federal revenues and raise deficits by roughly $1.5 trillion over ten years. However, there are several key contrasts between the measures that lawmakers will eventually have to work out to get a final bill to President Trump’s desk before Christmas, which is currently the very ambitious goal.
Who Benefits Most Under Each Bill?
Details vary among economic estimates, making it difficult to get exact answers, but multiple independent analyses indicate that both bills give the majority of short and long-term benefits from the $5.9 trillion in tax cuts to the top 10 percent of income earners. According to one independent report1 under the House bill, the richest one percent of income earners would receive 31 percent of the benefit in 2018, which would grow to nearly half of the total benefit by 2027.
According to the same report, in 2018 the average benefit from the House bill for low and middle-income earners—including the majority of adults 65 and older making less than $40,000 annually—could be as little as $2.50 to $14.40 per week respectively ($130 to $750 annually). Additionally, because many of the individual benefits in the current proposals expire in 2025, in the longer term a significant percentage of older adults on fixed incomes would end up paying more in taxes than under current law (assuming that the 2017 tax cuts were not extended). Given that a majority of Medicare beneficiaries currently earn less than $26,000 per year, any increased tax burden on these individuals would be difficult to absorb.
What the ACA Individual Mandate Repeal Could Mean for Older Adults
Despite the fact that many of the tax benefits for individual filers would eventually expire, the 43 percent cut in the corporate tax rate (from 35 to 20 percent) is permanent in both House and Senate proposals. In the Senate bill, tax cuts for corporations are paid for by repealing the tax penalty for not having health insurance coverage, which was initially implemented in the Affordable Care Act. The Congressional Budget Office (CBO) recently estimated that eliminating this “individual mandate” for insurance coverage would save the federal government nearly $340 billion in premium support costs for people who choose not to purchase insurance. The Senate has proposed using this savings as an offset to pay for permanently reducing the corporate tax rate.
However, the CBO also estimated that removing the mandate would mean that younger, healthier individuals would be more likely to decline health insurance coverage, which would skew insurance risk pools and ultimately drive up costs for older, sicker individuals—specifically people age 55-64 who don’t yet qualify for Medicare. This shift in the risk pool could drive up costs and put affordable coverage options out of reach for older adults, which means they may forgo necessary medical care and reach Medicare eligibility with more severe health care needs. For older individuals who choose to purchase insurance coverage, the increased cost of health insurance could reduce or completely eliminate any of the benefits included in the tax proposals.
While lawmakers in the House opted to preserve the ACA’s individual mandate, lawmakers approved offsetting a permanent corporate tax cut by eliminating some individual tax breaks after eight years. On the expiration list is a $300 tax credit for individual filers taking care of older family members. According to House leadership, the expectation is that Congress would prevent those benefits from expiring by extending them, but it is likely that such an extension would also drive up the federal deficit.
Repeal of Current Tax Policies that Benefit Low to Moderate-Income Older Americans and CBOs
The House also eliminated several tax benefits that will disproportionally affect older, sicker, lower-income older adults and the local CBOs, including AAAs, that deliver aging services. In particular, the House tax bill would eliminate the medical expense deduction starting in 2018. Nearly 9 million tax filers claim this benefit, which allows taxpayers to deduct medical and many long-term services and supports (LTSS) costs, which effectively eliminates the tax burden for many older adults and caregivers with high medical and LTSS costs. Without this benefit, millions of seniors and their families requiring LTSS—either at home or in an institutional setting—could pay thousands more in taxes annually.
By eliminating this critical deduction—and effectively increasing the cost of privately paid LTSS—many older Americans who are paying for LTSS could spend down their personal financial resources more quickly and hasten their trajectory toward Medicaid eligibility. The proposal to eliminate this critical deduction could also increase the financial and personal burden on unpaid caregivers attempting to compensate for more expensive LTSS. Additionally, we expect that AAAs and other CBOs providing home and community-based services targeted toward pre-Medicaid eligible older adults could see demand for their services grow as families attempt to fill in resulting care gaps.
The Senate plan to completely eliminate the State and Local Tax (SALT) deduction and the House proposal to roll back this current individual tax benefit would mean that nearly 30 percent of filers—or 44 million people—who itemize state income, sales and property taxes—would no longer benefit from this deduction. This would hit individuals, communities and states with higher tax burdens hardest. Experts believe that repealing or limiting this deduction would make it politically harder for states and counties to raise revenue and, in the long-term, shift the cost of paying for state/local services from higher to low and middle-income earners. Analyses of this proposal also indicate that, over time, states could shift service costs to communities, stressing local budgets. This provision also creates a disincentive for implementing additional revenue streams, such as millages, etc., to pay for local programs, and could have repercussions for AAAs and CBOs that depend on funding from state and local governments.
Proposals in both bills to nearly double the standard deduction could also have implications for nonprofits, including AAAs and other service providers, that rely on charitable giving. According to a report released today from the independent Tax Policy Center, nationwide, nonprofits could lose up to $24 billion in 2018 alone because the incentive to itemize charitable deductions would be significantly reduced by an increased standard deduction. With a nearly doubled standard deduction, the report estimates that the number of filers who itemize their returns would fall from 46 to 13 million. The repeal of the estate tax alone could reduce charitable bequests by $4 billion.
Would There Be an Immediate Hit to Medicare?
Yes…and no. Current budget law requires the Office of Management and Budget (OMB) to issue automatic, across-the-board, spending cuts to federal mandatory programs if Congress passes any legislation that increases the annual deficit or long-term debt. This policy is known as “PAYGO” and is intended to force Congress to pay for policies as they “go.” Because the current House and Senate tax cut proposals would increase the annual deficit by over $100 billion, under current law, OMB would be required to make cuts to several mandatory programs including Medicare (some mandatory programs, including Medicaid, Social Security, the Social Services Block Grant and mandatory nutrition programs are exempt from automatic PAYGO cuts).
Annual cuts to Medicare under PAYGO are capped at four percent, which is roughly $25 billion. Therefore, any proposal to raise the deficit could trigger a maximum, automatic cut to Medicare equal to that amount. However, Congress can waive these rules and frequently does, so we expect that any automatic mandatory cuts to Medicare would be prevented by lawmakers. The much larger threat to Medicare remains in the nearly $500 billion in cuts proposed in the FY 2018 budget resolution, which Republican leaders have indicated they hope to advance next spring.
Next Steps on Tax Cuts
Congress could move very quickly—within the next two weeks—to pass a compromise tax cut bill and send it to the President’s desk by the holidays. While the House proposal has passed that chamber, it is not clear that the Senate currently has the votes to pass its version. However, we expect that Senate Majority Leader Mitch McConnell (R-KY) will bring the bill to the floor next week.
It is also possible that the Senate could consider an amendment to the bill that would completely replace the measure that passed the Finance Committee last week. This amendment, known as a “substitute amendment,” could reflect a compromise already agreed to by House Republicans, which would further hasten the timeline for final passage. This would also mean that a final bill could make it to the White House for signature absent any committee hearings or independent analysis—an unprecedented process if that is the case.
What’s Next for Aging Advocates?
n4a and many national aging advocates will continue to oppose any tax cut proposal that paves the way to significantly cut federal domestic and mandatory programs serving older adults in their homes and communities, and we urge local advocates to use this limited window of opportunity for advocacy to tell your Members of Congress to oppose these plans. It also remains essential to continue to educate lawmakers about the importance of cost-effective, efficient non-defense discretionary programs such as the Older Americans Act and other key aging programs, as well as Medicaid, Medicare and critical income-support programs, to ensuring that older adults age with dignity in their homes and communities.
1 Institute on Taxation and Economic Policy. (November 2017). Richest Americans Benefit Most from The Tax Cuts and Jobs Act. Retrieved November 21 from https://itep.org/wp-content/uploads/housetaxplan.pdf.
This Legislative Update is an n4a membership benefit. For more information about these and other federal aging policy issues, please contact n4a’s Public Policy and Advocacy team: Amy E. Gotwals (email@example.com) and Autumn Campbell (firstname.lastname@example.org), 202.872.0888.
View this Legislative Update as a PDF.