Expanding Medical Deduction Would Add to Debt

Congress is at it again - proposing to extend tax breaks without paying for them, and add new ones in the process. Today, the House voted to expand the medical expense deduction by reversing a change used to pay for the Affordable Care Act (ACA). Because this proposal is not offset, CBO estimates it will cost $33 billion over 10 years. This increase would violate PAYGO rules and worsen an already unsustainable debt situation.

Proposal Would Reduce Tax Revenue, Without Offsets

Taxpayers can currently deduct very high out-of-pocket medical costs from their taxable income. Between 1986 and 2013, such costs could be counted as an itemized deduction if they exceeded 7.5 percent of adjusted gross income (AGI). In order to help finance the costs of the Affordable Care Act and possibly help to slow health care cost growth, Congress changed this threshold to 10 percent of income starting in 2013 for most taxpayers and in 2017 for seniors.

The bill passed in the House (H.R. 3590) would permanently undo the increases of the threshold in the health care law, preventing the increase that is scheduled to take place next year for seniors and rolling back the increase for non-seniors that has been in effect for three years. According to CBO, this change would result in $33 billion less in revenue over a decade, mostly coming from the top half of the income spectrum.

So far, no pay-for has been put forward.

Proposal Would Continue Costly Trend of Continuing Expired Tax Breaks and Repealing Obamacare Revenue Sources Without Offsets

The "Halt Tax Increases on the Middle Class and Seniors Act" would continue the current medical deduction for seniors and restore it for workers without paying for the costs, despite that fact that both current law projections and the House Republic Budget proposed by Budget Committee Chairman Price Budget assume that the provision expires (or is paid for with other revenue in the context of tax reform).

Similar practices related to other tax breaks have led to huge increases in the debt in recent years. For example, the unpaid-for extension of tax breaks last December ended up adding $830 billion to the debt over a decade and were responsible for significant deterioration of the nation's medium-term fiscal picture.

Last December's $830 billion package also shared something else in common with the "Halt Tax Increases on the Middle Class and Seniors Act" – it cut several revenue sources established to pay for the Affordable Care Act. Specifically, December's legislation included a two-year delay of the medical device tax, the health insurance tax, and the Cadillac tax on high cost plansas well as more permanent changes to the Cadillac tax that will reduce long-term revenue. The current proposal continues the trend, reversing another tax change explicitly enacted to finance the expanded availability of health insurance.

Further Fiscal Irresponsibility Could Be on the Horizon

Although Congress permanently extended many expiring tax provisions last year, there are over 30 smaller tax breaks that also expire this year. They include credits for renewable diesel, and tax provisions related to mortgages and energy efficiency. There are also a host of narrow tax breaks for specific industries, such as a credit for film production or special depreciation for NASCAR tracks and racehorses.

Extending all of these provisions expiring at the end of 2016 without offsets would cost $141 billion over 10 years.

Cost of H.R. 3590 and Other Provisions Expiring in 2016
Policy Ten-Year Cost
Being Considered Now $33 billion
Permanently extend the lower deduction floor for seniors of 7.5% income $18 billion
Roll back the higher deduction floor for non-seniors $14 billion
Also Expiring in 2016 $108 billion
Provide tax credits for biodiesel and renewable diesel $23 billion
Exclude from income the forgiven mortgage debt $23 billion
Allow deduction for mortgage insurance premiums $13 billion
Tax credits for energy efficient homes and residential property $13 billion
About 30 other provisions $36 billion

Source: Congressional Budget Office

Totals may not add due to rounding.

The debt is on an unsustainable enough path without Congress adding more to the debt. Furthermore, a bill that rolls back savings that are intended to pay for the coverage expansions in the ACA continues a worrying trend from last year. 

If Congress wants to extend and expand this tax break, they should pay for it with savings elsewhere in the budget.

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