Debate Over Medicaid, Tax Cuts in Budget Reconciliation Bill Heads to Senate

House Committee on Energy and Commerce Vice Chairman Rep. John Joyce (R-Pa.) presides over a hearing about Medicare and Medicaid on Capitol Hill in Washington on May 13, 2025. Madalina Vasiliu/The Epoch Times

Commentary

Republican lawmakers in the Senate continue to negotiate the budget reconciliation plan, which passed the House on May 22, with much of the focus on proposed tax cuts and Medicaid spending.

Part of the debate arises from the fact that the House committee charged with Medicaid and other programs was given the task of reducing spending by $880 billion over 10 years in order to partially offset the budgetary impact of extending individual income tax reductions in the Tax Cuts and Jobs Act (TCJA) of 2017 which, under current law, will expire at the end of the year.

Unless the TCJA reductions are extended, most taxpayers will see significant income tax rate hikes in 2026. For example, those now in the 12 percent marginal tax bracket will see an increase in their marginal rate to 15 percent. This tax bracket will kick in at around $12,150 of taxable income for a single filer in 2026. Similarly, the 22 percent bracket, which will start at around $50,000 of taxable income, will become the 25 percent bracket.

So, even taxpayers reporting low or moderate incomes for 2026 could see a large tax hike if reconciliation ultimately fails.

Because the old tax code had some deductions that were ended by TCJA, some taxpayers would see higher taxes next year if its provisions were extended. But the Tax Foundation found that more taxpayers in all income quintiles will gain than lose from the TCJA extension. So, the benefits of extending the tax cuts will go to taxpayers across the earnings spectrum.

Turning to the Medicaid reductions, the latest available Congressional Budget Office (CBO) estimate suggests that the reconciliation plan would reduce program spending over the 10-year budget window by at least $715 billion (with $197 billion of additional savings coming from cuts to other government spending overseen by the House Committee on Energy and Commerce).

While $715 billion sounds like a very large cut, it amounts to only 8.3 percent of the $8.6 trillion CBO anticipates that the federal government will spend on Medicaid under current law between fiscal year 2026–2035. Indeed, the cut would still allow Medicaid spending to grow considerably from its current level.

Proposed changes include penalizing states for allowing coverage for immigrants illegally residing in the United States and increasing the frequency of eligibility checks. Terminating coverage of unauthorized individuals in California, Washington, Illinois, and New York would reduce the number of Medicaid beneficiaries, but these individuals could get coverage at much lower cost in their home countries.

Frequent eligibility checks are useful to ensure that beneficiaries who have passed away, moved to another state, or obtained employer coverage are no longer on the rolls. These checks may seem like an unnecessary way of harassing eligible beneficiaries for the purpose of preventing them from using benefits to which they are entitled. And that perspective would have made sense in the early days of Medicaid when most beneficiaries used the program on a fee-for-service basis. Beneficiaries who died or relocated would no longer use benefits, and so their continued presence on the rolls would make little difference.

But today, most Medicaid beneficiaries are served by Managed Care plans under which the state pays an insurer a monthly premium regardless of whether the beneficiary uses any services. So, having ineligible beneficiaries on the rolls means that the state is paying insurers for nothing and using federal funds while doing so.

Perhaps the most controversial Medicaid proposal involves “work requirements,” but this term does not properly describe reforms. If reconciliation passes in its current form, adult beneficiaries without dependents would have to show that they worked, volunteered, or received education for at least 80 hours per month. So, beneficiaries can remain on Medicaid by studying part-time or by volunteering at the food bank, animal shelter, or other community service providers.

In the absence of a budget plan this year, most taxpayers will face a large tax hike next year. However, if the tax hikes are postponed without spending cuts, budget deficits will increase further, potentially increasing the national debt and compromising the nation’s credit. So, something needs to be done.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.