As a person living outside “the beltway,” you might assume that the House tax reform writers must have understood the impact eliminating something as straightforward as the medical expense deduction would have. It appears you’d be wrong.
Unfortunately, the medical expense deduction had no interest group dedicated to it. Health advocacy groups focus on health advocacy, not tax.
For Congress, if you don’t ask, you don’t receive, and since presumably no one asked over the years to keep the deduction, it must be okay to get rid of it!
The House tax reform bill was passed in November 2017, seeking about $1.5 trillion in tax cuts. The cuts were split evenly between corporations and individuals (including pass-throughs). The individual tax cuts approximated the cost of repealing the estate tax and the alternative minimum tax (AMT).
Changing the Way Individuals Are Taxed
But the House bill did much more than just cut taxes; it sought to redefine the way individuals get taxed. First, it ended personal exemptions and removed as many itemized deductions as (politically) possible. It then lowered tax rates, expanded family credits, and doubled the standard deduction.
A key philosophy underpinning this move to eliminate itemized deductions is that in the ideal world, we should have a consumption tax.
But even under a consumption tax, one must distinguish between “voluntary” and “involuntary” expenses. The former shouldn’t be exempt, the latter should.
Getting sick isn’t a choice. People don’t choose to get dementia or cancer. People don’t choose to have a disability.
In truth, the medical expense deduction acts more like hidden insurance. No clearer example exists than in paying for long-term services and supports (LTSS).
Under the deduction, “chronically ill” individuals can deduct “qualified long-term care expenses,” such as nursing home, assisted living, or personal care services.
Not every American will need LTSS. Half of Americans turning 65 today will not incur any LTSS costs; an unfortunate one in seven will have costs of more than $250,000.
In September, Republicans introduced an outline that sought to end all itemized deductions except the home mortgage interest and charity deductions. This implied the elimination of the medical expense deduction.
At the time, few health advocates, journalists, and policy wonks understood the issue.
NAELA began preparations in the event the implication proved correct. A few organizations were preparing as well, notably AARP and LeadingAge, the association for non-profit LTSS providers.
Our Worst Fears Realized
On November 7, 2017, our worst fears were realized: total elimination of the medical expense deduction.
NAELA focused on how this would impact LTSS. Many individuals would not be able to pay for both LTSS and a new tax bill. Those who could afford both would see their life-savings dwindle more rapidly, spending down to Medicaid faster.
Eliminating the deduction would also wreak havoc on individuals relying on either a defined benefit plan or a tax-deferred retirement account, albeit in different ways.
Defined benefit plans, colloquially called pensions, pay guaranteed income during someone’s life. Those relying on a pension and paying privately in assisted living may not be able to pay the new tax bill and facility fee, facing potential eviction. Worse, those who ended up on Medicaid with a pension may have an uncollectable tax!
Tax-deferred retirement accounts raised another issue. Without the deduction, the higher your health costs, the higher your tax bill. Distributions from these accounts after all are income.
It gets worse from there, because distributions to pay the new tax are also taxable! It also threatens to raise taxes on someone’s Social Security benefits as well, which are excluded at lower income levels.
In addition, the elimination would harm family caregivers, because if an adult child pays more than half of the cost of a parent's care, they can claim what they paid as a deductible medical expense.
Few journalists and no policy wonks reported on the medical expense deduction after the outline, but before the House bill got introduced, many focused on the rumored “rothification” of retirement accounts, the state and local tax deduction, and deficits.
The moment the bill got introduced, NAELA was ready.
NAELA quickly mobilized with AARP and a few others to educate Congress and importantly, other health organizations. Our loose coalition quickly grew from just a handful to more than 60 groups. This included adding the power of large organizations such as the March of Dimes, the American Cancer Society, and the National MS Society.
Changing the Public Debate
Ultimately, NAELA helped change the public debate on the medical expense deduction, by focusing attention on its impact on LTSS. This was important, because a focus on the average deduction taken misses the point of the medical expense deduction.
After intensive lobbying, the Senate passed a bill that not only retains the medical expense deduction, but thanks to Senator Susan Collins, temporarily lowers the threshold to 7.5 percent of adjusted gross income for the next two years.
The final compromise bill kept the Senate provisions. In the end, advocates helped save and expand the deduction, an incredible feat considering the speed by which Congress passed the legislation.