On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act, also known as Obamacare. In addition to health care exchanges and a personal mandate to have health insurance, one of the most visible features of Obamacare is the 3.8% surtax on net investment income for wealthier taxpayers. This health care legislation mobilized great resistance and led to Republicans gaining dozens of seats in Congress and control of the House of Representatives in the 2010 midterm elections. “Repeal Obamacare” continued to be the rallying cry of Republican resistance to President Obama and the Democrats.
When Republicans gained control of the White House, the House of Representatives, and the Senate after the 2016 elections, it appeared Obamacare’s days were numbered. Republicans in the House of Representatives, led by Speaker Paul Ryan, put together a replacement plan, the American Health Care Act, which would remove the personal mandate and the 3.8% surtax on net investment income, as well as dismantle much of Obamacare. The measure narrowly passed the House on May 4, 2017.
The Senate took up the topic behind closed doors, hoping to avoid the public ire which the House had faced. The Senate’s first attempt would have repealed the 3.8% surtax and would have made deep cuts to Medicaid, in addition to repealing much of the Affordable Care Act. When that legislation did not garner sufficient support, it was replaced with a new bill which did not repeal the 3.8% surtax and provided more funds for opioid abuse. Two moderate senators quickly came out against the proposal because it still would have reduced the rolls of the insured too drastically. But, the effort was still alive if every remaining Republican senator would have voted in favor. Then, the effort became delayed by Senator McCain’s recovery from a craniotomy, since every Republican vote was needed. Then, the second effort failed on July 17 when two conservative Republicans voiced their intent to vote no because they did not think the bill went far enough.
In short order, on July 18 Majority Leader McConnell announced his plan to repeal Obamacare and its 3.8% surtax without a simultaneous replacement. The repeal would be effective in two years. Almost as quickly as it was proposed, the delayed repeal seems to have collapsed because three moderate Republicans said they cannot support repeal without an immediate replacement due to the turmoil it would cause. Leader McConnell insists a vote will be held on the repeal bill “in the very near future.”
At least for now, Obamacare and its 3.8% surtax are here to stay. So, for wealthier taxpayers, those with income above $200,000 ($250,000 if married filing a joint return) the 3.8% surtax will be part of the analysis. This means that strategies to avoid or defer large gains, such as Charitable Remainder Trusts, will still be strategies to contemplate.
In this era of high drama, nothing seems certain anymore. It appears that health care reform, which has confounded countless lawmakers over the decades, both Democrats and Republicans, has now been moved to the back burner. It’s not clear what will now take center stage. It’s likely that the budget and debt ceiling will be next on the agenda. Assuming the effort to repeal Obamacare has failed (at least for now) it means that any plan to overhaul the tax system, whenever that might be taken up, will not be able to be as broad as would otherwise have been possible. Obamacare’s repeal would have freed up more money to give back in tax cuts.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128