While many celebrated the abrupt unraveling of President DonaldTrump's and House Republicans' recent efforts to repeal and replacethe Affordable Care Act (ACA), this shift could change thetax-exempted status of employer-provided health care plans.

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Within minutes of the GOP pulling the American Health Care Act(AHCA) from a House floor vote, Trump and Republican congressionalleaders vowed to immediately pivot their attention to comprehensivetax reform.

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Some benefits industry experts fear that means Trump, Housefiscal conservatives and intransigent Democrats committed toresisting the President's agenda at all costs will begin usingproposals to tax employer-sponsored benefits as a bargainingchip.

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“We remain on absolute full alert on the issue,” says Joel Wood,senior vice president of government affairs for the Council ofInsurance Agents and Brokers (CIAB), which advocates on behalf ofbenefits consultants.

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The employer-sponsored health benefits exemption representstrillions of dollars in forgone tax revenue, accounting for the taxcode's largest exclusion.

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For its part, the Trump Administration has vowed to cut thecorporate tax rate from 35 to 20 percent and reduce the number ofindividual tax code brackets from its current seven to justthree.

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But revenue must be generated in other budget areas in order tooffset the losses and justify these cuts. The Congressional BudgetOffice (CBO) will score any proposed legislation that emerges inthe coming months. Tax reform could ultimately be stalled by fearsthat aggressive tax cuts will swell the deficit – just as healthcare reform was significantly impacted by the CBO's most recentscore of the AHCA.

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“There is no way to get the corporate rate down to 20 percentwithout putting everything on the table,” says Wood. “That includesemployer benefits. There will be no sacred cows in thatdiscussion.”

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The AHCA's failure to garner the necessary 216 votes needed topass the House exposed deep ideological fractions in the Republicancaucus – and served as a stunning political defeat for the WhiteHouse.

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The failed bill, though, also led to Republicans taking up taxreform, which may make it even easier for them to attack thepreferential treatment of employer benefits as Republicans take uptax reform. In failing to pass the AHCA, Republicans left about $1trillion in ACA taxes on the books. All told, the AHCA would havereduced federal spending by roughly $300 billion over 10 years.

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Now, lawmakers will have to look at other ways to offsetaggressive cuts to a tax code that was last amended during theReagan administration.

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Employer plan fate pegged to borderadjustment tax

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The White House has said it intends to use reconciliation rulesfor the 2018 budget to push tax reform through the houses. Thismeans they could amend the code with a simple Senate majorityrather than the 60 votes required for standalone legislation.

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But as the industry learned with the AHCA's failure, afast-track option for reconciliation isn't always as good as itlooks.

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The same ideologies that divided Republicans – a division thatwas sharply exposed by the AHCA's struggle – can be expectedto cloud the tax reform debate.

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Specifically, House Republicans have proposed using aborder-adjustment tax – which may raise up to $1 trillion inimportation taxes – to pay for tax cuts. The White House has yet torubber stamp the BAT.

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But media reports say the majority of the House's conservativeFreedom Caucus opposes the BAT, just as they opposed the AHCA.

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Ultimately, the BAT's fate will determine how tax reform treatsemployer-provided insurance, says Wood.

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“That's the bigger issue — what traction will the BAT have?”says Wood. “You can't get anywhere close to a 20 percent corporaterate without it.”

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Back to square one for benefitsadvocates

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The most recent attempt to limit the group benefit tax exclusionfound immediate resistance after an early AHCA discussion draftincluded a tax on the 90th percentile of group premiums.When the legislation was officially proposed, however, the tax wasnowhere to be found.

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Wood says the CIAB and other benefits and employer advocatespushed back at Capitol Hill once they learned about the draft'sintent to tax benefits.

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“We raised hell for those two weeks and made a lot of progresseducating lawmakers after the discussion draft was released,” hesays.

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But while the issue of employer insurance taxation will continueto be “politically fraught,” employer market advocates are workingblind, without any traditional sources of thought leadershipaddressing the issue, according to Wood.

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“We've lost the conservative and libertarian economicintelligentsia on the exclusion issue,” says Wood.

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Over the past decade, more conservative economists have embracedthe idea that employer-based insurance adds to health careinefficiencies by making employees bad health care consumers.

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By taxing benefits, they say, employees would immediately havemore skin in the game. This should make them more judicious abouthow and where they consume health care, according to conservativeswho are pro-benefit taxation.

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“The reality is that Speaker (Rep. Paul) Ryan, Rep. (Kevin)Brady and Sen. (Orrin) Hatch — all influential Republicans on taxreform — are on the record in favor of scaling back the taxexemption,” he says. “And (U.S. Health and Human ServicesSecretary) Tom Price's own proposed legislation would have scaledback the exclusions.”

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Pressure for fast reform may be a wildcard

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As with health care reform, Republicans will be under pressureto reform the tax code as quickly as possible.

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Not only has the party committed to a mid-summer timeline, butthe loss of a failed AHCA increases the sense of urgency “to easethe political blow,” says Garrett Fenton, an ERISA specialist inthe benefits practice of Miller & Chevalier.

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“We've always been concerned of the possibility that tinkeringwith the tax exclusion would rear its ugly head in the tax-reformdiscussion,” says Fenton. “Congress' task is to get something donequickly. That complicates things when the goal is to effectuatesuch large changes to the tax code that will be subject to budgetconstrictions.”

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Whatever reforms are proposed, they will come at a big budgetarycost. Health care benefits are now the low-hanging fruit of revenueoffset.

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“Congress is going to have to find money from somewhere,” Fentonsays.

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To be clear: No one expects all employer-provided healthinsurance to be taxed. Still, Fenton predicts that anyproposal will meet stiff opposition from employer advocates.

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As for Wood and the CIAB, they are bracing for a battle.

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“Our message will be clear: Hands off the market that supplieshealth insurance to 61 percent of the country,” said Wood.“Employers have it difficult enough. We don't want further healthcare cost shifting onto employer plans.”

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If lawmakers aren't willing to hear that message, Wood says theCIAB is prepared to “aim every bit of blunt political impact we canmuster if they attempt to tax employer-provided plans.”

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