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Likely Democratic Tax Proposals for COVID-19 Medical Expenses

Posted on Apr. 2, 2020

Benjamin M. Willis (@willisweighsin on Twitter; ben.willis@taxanalysts.org) is a contributing editor for Tax Notes Federal. He previously worked in the mergers and acquisitions and international tax groups at PwC, and then with the Treasury Office of Tax Policy, the IRS, and the Senate Finance Committee. Before joining Tax Analysts, he was the corporate tax leader in the national office of BDO USA LLP.

In this article, Willis explores possible Democratic legislative proposals in response to the coronavirus pandemic and their likely focus on relief for medical expenses and protecting the health of all citizens.

The coronavirus public health emergency is testing the limits of the U.S. healthcare system’s capacity to take care of those who are critically affected by it. But this emergency will also test individuals’ ability to pay for healthcare expenses as a result of the economic crisis that the virus has precipitated through the loss of income, jobs, and related health insurance benefits. The code already has provisions that could relieve some of the impact of these increased expenses, but time is of the essence to make the changes necessary for maximizing those protections available to Americans.

Legislative proposals in a “phase 4” bill, and not just from Republicans,1 will indeed follow the first three bills when the effects of the pandemic can be more accurately determined. Democrats will continue to focus on fighting to protect the health of all American citizens, not just those who can afford to prepare for the next global pandemic and economic crisis.

More proposals for large businesses are already being pushed following passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. For example, on March 29 President Trump said he wants to restore corporate tax deductions for business meals as restaurants reel from the effects of the coronavirus outbreak.2 I think Democrats will want deductions for individuals to be expanded, and they will likely prioritize deductions or credits for medical expenses.3

Section 213 now allows individuals to deduct medical expenses that exceed 7.5 percent of adjusted gross income (the current floor) if the expenses are neither covered by health insurance nor otherwise reimbursed. Beginning next year, under section 213(f), the percentage will generally be increased to 10 percent. It seems very likely that Democrats will push for a refundable no- or low-floor, above-the-line deduction, which would apply to those who take the standard deduction or itemize.

Section 213 Was Created for This

Congress created the medical expense deduction with a 5 percent floor in the Revenue Act of 19424 to maintain good public health as a way to protect the economy. Congress stated: “This allowance is recommended in consideration of the heavy tax burden that must be borne by individuals during the existing emergency [World War II] and of the desirability of maintaining the present high level of public health and morale.”5 The nation’s public health, and yes, its morale and mental health, are essential to maintaining its economic health.

When the predecessor to Blue Cross and Blue Shield was founded in 1929 with the goal of ensuring healthcare for all,6 healthcare was largely a privilege for the rich, and the poor were, when possible, afforded it through donations from wealthy individuals. Those who couldn’t afford healthcare were often helped by privately supported voluntary hospitals relying on medical staff completing apprenticeships.7 But the expansion of Blue Cross and Blue Shield and great federal benefits didn’t really begin until the 1940s, largely in response to World War II.8

One common complaint about the medical expense deduction is that “it is simply not sensible to allow a greater benefit to the higher-income taxpayer even though the lower-income taxpayer has had exactly the same deductible medical expenses.”9 That is because lower-income earners have little use for the deduction, while those in the higher rate brackets with high incomes get a larger tax reduction for each dollar of deductible medical expense. The dichotomy created with a floor based on a percentage of adjusted gross income and a progressive rate structure can be cured only by the removal of the floor altogether.

The Revenue Act of 195110 removed the 5 percent threshold for taxpayers 65 or older because they often have lower earnings and higher medical expenses. Thus, the elderly had a no-income limit, while the 5 percent floor continued for all taxpayers under age 65. But the logic underlying the 1951 change for the elderly also holds true for those in the lower income brackets whose medical expenses leave little for personal living costs.11

Through the 1954 code,12 Congress doubled the cap on amounts that could be deducted to $2,500, and the threshold for deductibility was lowered from 5 percent to 3 percent of adjusted gross income. The House Ways and Means Committee explained the change: “There is general agreement that limiting the deduction only to expenses in excess of 5 percent of adjusted gross income does not allow the deduction of all ‘extraordinary’ medical expenses. Also, in many cases the maximum limitation has created a hardship by preventing the deduction of large medical expenses actually incurred.”13 It’s hard to think of any medical expenses permitted by section 213 that aren’t extraordinary. Those expenses clearly aren’t what section 262(a)’s limitation on personal expenses was intended to prevent deductions for.

Since 1954, the medical expense deduction has been changed over a dozen times. While a detailed examination is beyond this article, a short summary of the floor changes is in order. In 1982 the AGI floor was raised back up to 5 percent.14 In 1986 it was increased to 7.5 percent apparently for simplicity, to reduce complex calculations and the number of returns claiming the deduction (attributable to the floor).15 One likely reason that the income floor has floated between 0 and 10 percent over nearly 80 years is to accommodate congressional budget constraints and concerns. But Democrats will find support in their argument that income levels should not determine who is entitled to quality healthcare. Many Americans believe a “high level of public health and morale” is essential to strong economic health.

The Impact of the Affordable Care Act

In 2010,16 as part of the Affordable Care Act, the section 213 medical expense deduction threshold was increased from 7.5 percent to 10 percent for years beginning in 2013. One can surmise that this increase was put in place because Americans would have more access to health insurance options through the health exchanges or state-based expansions of Medicaid programs. But from the start the 10 percent threshold was delayed;17 while those delays were in place, the individual mandate was severely challenged,18 and a Republican-led Congress reduced the individual mandate penalty to zero under the Tax Cuts and Jobs Act. That became the impetus of California v. Texas, which the Supreme Court recently announced it will review19 to likely decide once and for all on whether a mandate with a penalty removed is still constitutional, and if not, whether its unconstitutionality requires that the entire ACA be struck down.20 The decision is highly anticipated.

Considerations for Future Legislation on Medical Expenses

Americans who were treated for the coronavirus have already been receiving bills for the expenses, which can reach into the hundreds of thousands for ventilator support. The executive director of Covered California, the state insurance marketplace created under the ACA, disclosed estimates that the average coronavirus hospital stay of nearly $72,000 for severe cases.21 There will also be increased costs overall for testing, diagnosing, and treating coronavirus, and increased costs attributable to individuals delaying care - whether it is from fears of exposure or simply because individuals who have lost their jobs and health insurance benefits won’t seek it out.22 Covered California’s actuarial brief makes the dire prediction that these increased costs could result in insurance premiums increasing between 4 percent to more than 40 percent in 2021.

Some may think that the CARES Act signed into law March 27 already does enough to address these issues. But its provisions, other than the ones providing stimulus checks to individuals under specific income thresholds, focus on employee health benefits. For instance, Subtitle C makes a clarification to the emergency family and medical leave payments limitation in the Families First Coronavirus Response Act that states employers shall not be required to pay more than $200 per day and $10,000 in the aggregate for each eligible employee. The CARES Act also clarifies that an employer shall not be required to pay an eligible employee more than $511 per day and $5,110 in the aggregate for sick leave, or more than $200 per day and $2,000 in the aggregate to an eligible employee to care for a quarantined individual or child. These payments are a drop in the bucket of potential healthcare expenses related to the coronavirus.

A few major health insurance companies — CVS Health’s Aetna23, Cigna24, Humana25, and United Healthcare26 as of the date of this article — have recognized the gravity of how unknown healthcare costs related to coronavirus may deter enrollees from seeking out treatment and be at risk of further spreading the disease, and announced that they will waive patient cost-sharing (copayments and deductibles) for coronavirus treatments27 and expanded access to other benefits designed to detect cases early. But many others have limited cost-sharing waivers to address only testing so far. These actions also do not address the needs of the uninsured, although 11 states have opened special enrollment periods to allow for buying coverage on the exchanges. Still, these remedies are piecemeal at best.

Goals

There is no question that now is the time to address the inevitable spike in U.S. healthcare expenses. Tax policy reform is an ideal way to provide some uniform cost mitigation. In offering proposals designed to improve the medical expense deduction, Democrats will likely look to the logic that led to its creation: improving public health and morale. Democrats have been pushing to make healthcare a higher congressional priority for decades, so providing tax benefits for the coming surge of expenses is merely a continuation of that historic goal. And because the availability of free or inexpensive healthcare for low-income taxpayers is much more precarious than when section 213 was originally enacted, those with lower incomes will have higher priority for relief through modifications to it.

The CARES Act amends section 62 by allowing non-itemizing taxpayers to take a $300 above-the-line deduction for some charitable contributions,28 which were historically below-the-line deductions available only to itemizers. Similar above-the-line treatment could be provided for the medical expense deduction. While section 67(g) of the TCJA provides that no miscellaneous itemized deduction shall be allowed for any tax year beginning after 2017 and before 2026, this could be modified at least temporarily even if the medical expense deduction is not pulled out of section 67’s 2 percent floor on miscellaneous itemized deductions altogether.

One or more of the following section 213 changes are likely to be proposed: (1) the AGI floor could be eliminated altogether or reduced, perhaps to 2 percent; (2) the deduction could become above-the-line and therefore benefit those who claim the standard deduction;29 and (3) deductions under section can be made refundable, which might be the only way some medical expenses could be paid.

Some will worry, legitimately, that these proposals would still require people to pay for their care who lack the means to do so, or that a section 213 deduction is worth only the marginal tax rate of households – 12 percent on the dollar for married couples filing jointly making less than $80,251 this year. Lawmakers focused on these concerns are likely to propose that medical expenses stemming from the pandemic be reimbursed through a 100 percent refundable tax credit. Section 36B contains a useful analogy of a refundable tax credit for what are effectively medical expenses paid through health insurance premiums. Reform beyond this is unlikely to occur anytime soon. While I would like to look further ahead, I am confident that at least the phase 4 coronavirus legislation will pass before any strong post-2020 predictions can be made. Realistic coronavirus-related legislative goals are my focus for now.

 

FOOTNOTES

1 Benjamin M. Willis, “Likely Future Republican Coronavirus Tax Proposals,” Tax Notes Federal, Mar. 30, 2020, p. 2073.

3 Jim Tankersley and Emily Cochrane, “Pelosi Floats New Stimulus Plan: Rolling Back SALT Cap” (Mar. 30, 2020); Alexis Gravely, “Critiques Roll In After Pelosi Suggests SALT Cap Rollback” (Apr. 1 2020); and Jad Chamseddine, “Next Coronavirus Bill to Focus on Recovery, Pelosi Says” (Mar. 31, 2020).

4 Revenue Act of 1942, P.L. 77-753.

5 S. Rep. No. 77-1631 (1942), reprinted in 1942-2 C.B. 504.

6 See O.W. Anderson, Blue Cross Since 1929: Accountability and the Public Trust (1974).

7 "History of Hospitals," University of Pennsylvania School of Nursing.

8 See Robert Cunningham III and Robert M. Cunningham Jr., The Blues: A History of the Blue Cross and Blue Shield System (1997). In 1986 it was decided that maximizing profits and competition among insurers should take priority over lowered healthcare costs. So after decades of aggressive lobbying and planning, the largest insurance companies eliminated their greatest impediment to more profit, the tax-sponsored benefits given to Blue Cross and Blue Shield organizations that dramatically lowered insurance costs to nearly 100 million people who couldn’t afford more expensive plans.

9 James W. Colliton, "The Medical Expense Deduction," 34 Wayne L. Rev. 1307 (1988).

10 Revenue Act of 1951.

11 See S. Rep. No. 82-781 (1951) (“Persons in that age bracket [65 or older] have generally reached a period of lowered earning capacity. These same individuals typically are confronted with increased medical expenses. Disallowance of the deduction of many of these expenses under present law merely serves to accentuate this existing hardship.”).

12 Internal Revenue Code of 1954.

13 H.R. Rep. No. 1337.

14 1982 Tax Equity and Fiscal Responsibility Act.

15 Tax Reform Act of 1986.

16 Affordable Care Act.

17 Most recently in the Further Consolidated Appropriations Act, 2020, P.L. 116-94.

18 National Federation of Independent Business v. Sebelius567 U.S. 519 (2012).

19 U.S. Supreme Court, "Certiorari - Summary Dispositions" (Mar. 2, 2020).

20 Katie Keith, “Trump Administration, Plaintiffs Urge Against Expedited Review in Texas,” Health Affairs Blog, Jan. 11, 2020.

22 Reed Abelson, “Coronavirus May Add Billions to the Nation’s Health Care Bill,” The New York Times, Mar. 28, 2020.

27 Bertha Combs, “Cigna and Humana Waive Coronavirus Treatment Costs” (May 29, 2020).

28 Generally, contributions to qualifying charitable organizations described in section 170(b)(1)(A), with some exceptions.

29 This could require altering section 67(b)(5) listing section 213 medical expenses as subject to the 2-percent floor on miscellaneous itemized deductions.

END FOOTNOTES

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