Republicans Give Rich Investors a Tax Break in Obamacare Revamp

(Bloomberg) -- House Republicans have a plan to remake the U.S. health-care system—with a perk for wealthy investors.

Included in their proposal to repeal and replace the Affordable Care Act is a tax break for the wealthy. The Obamacare replacement bill, unveiled on Monday night and endorsed by President Donald Trump with a tweet on Tuesday morning, eliminates the net investment income tax, a 3.8 percent surcharge on almost all earnings from investments. The net investment income tax is paid only by single people with incomes above $200,000 and married couples earning more than $250,000.

The average hit from the NIIT doesn't get beyond three figures unless you're in the top 1 percent of earners. The tax casts a wide net, though. Investors must pay that additional 3.8 percent on proceeds that include capital gains, dividends, interest, royalties, rental income, and passive business income.

"My sense is that this [tax] is not one that's easy to avoid or evade," said Roberton Williams, a fellow at the Tax Policy Center in Washington.

Eliminating the NIIT, introduced to help pay for health-care expansion under Obamacare, would reduce government coffers as the Trump administration is seeking budget cuts in many departments and as the cost of repealing and replacing Obamacare is in the spotlight. Repealing the tax would cost the U.S. Treasury $158 billion over 10 years, according to new estimates from the Joint Committee on Taxation, a nonpartisan congressional panel that studies tax policy.

The NIIT isn't the only tax in the Affordable Care Act that House Republicans want to eliminate. They're also targeting a 10 percent tax on indoor tanning salons, a 2.3 percent tax on medical devices, and a 0.9 percent Additional Medicare Tax on the wages of upper-income taxpayers.

The benefit to taxpayers of eliminating the NIIT would be concentrated at the top of the income spectrum. The top 1 percent of taxpayers pay about 90 percent of the net investment income tax, according to Tax Policy Center estimates. The top 0.1 percent pay 62 percent. Doing away with the NIIT would boost after-tax incomes of the top 0.1 percent of taxpayers by 2.2 percent, or an average of about $165,000 a year.

A repeal of the NIIT could offer the wealthy an opportunity for some clever tax planning. Post-repeal, it might make sense to move into a more income-oriented portfolio, for example, said Tim Steffen, director of financial planning at Robert W. Baird & Co. It also might affect when taxpayers decide to sell investments and take capital gains. Investors today could avoid the tax by waiting to sell until 2018, when it is slated for repeal. 

"This tax going away will certainly have an impact," Steffen said. But he warned not to let news from Washington dictate investment decisions quite yet. If the NIIT is eventually repealed, taxpayers will have a chance to come up with a planning strategy at the end of this year, he said. Until then, "we don't know if this is actually going to happen or not."

Most taxpayers, even high earners, will scarcely feel the savings. The bottom 90 percent of taxpayers, those earning less than $209,000 a year, almost never pay the net investment income tax. Those in the 90th to 95th percentiles, earning from $209,000 to $292,100 a year, pay an average of $30 a year in net investment income taxes.

One side effect of the NIIT was to bring the tax rates on investment income a little more in line with the taxes paid by workers. While the top tax rate on some investment income is 39.6 percent, the same as the top rate for labor income, the top rate for long-term capital gains and qualified dividends is 20 percent. Workers, meanwhile, are subject to payroll taxes, including Social Security and Medicare.

So a wealthy person who lives exclusively off investments still probably pays a much lower tax rate than, say, a doctor, lawyer, or other well-paid professional. The net investment income tax narrows that gap a bit.

To contact the author of this story: Ben Steverman in New York at bsteverman@bloomberg.net.

To contact the editor responsible for this story: Peter Jeffrey at pjeffrey@bloomberg.net.