Senate aides: Reid considering Medicare payroll tax increase on wealthy

Senate Majority Leader Harry Reid pondering a proposal to increase the Medicare payroll tax on high earners "to help offset the costs of providing health insurance to millions of Americans, Senate aides said Thursday," The New York Times reports.

The proposal is in the health reform package that Reid has sent to the Congressional Budget Office for analysis. "The Medicare payroll tax is the primary source of financing for Medicare's hospital insurance trust fund, which pays hospital bills for beneficiaries, who are 65 and older or disabled. Employers and employees each pay a tax equal to 1.45 percent of wages. Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 in 2009), the Medicare tax is levied on all of a worker's earnings without limit. Mr. Reid is apparently considering an increase in the Medicare payroll tax rate for workers with incomes of more than $250,000 a year, Senate aides said. One idea is to increase the tax rate by one-half of 1 percentage point, to 1.95 percent for high-income people, with an expectation that the government could raise $40 billion to $50 billion over 10 years" (Pear, 11/12).

The Washington Post: "Another option is applying the Medicare tax for the first time to capital gains income, White House budget director Peter Orszag said Thursday at a Washington summit organized by a corporate affiliate of Bloomberg News." Inclusion of that tax could allow so-called "Cadillac" plans to be taxed less than initially proposed, The Post reports. "But Reid is unlikely to completely abandon the Cadillac tax, Democrats say," because the tax could cause people to buy lower-cost health insurance policies (Montgomery, 11/12).

The Wall Street Journal reports that "Reid is looking at raising the threshold for insurance policies that would be subject to the 40 percent (Cadillac) tax to $8,500 for individuals and $23,000 for couples, Senate aides said." Levying a surtax on high income earners instead of on Cadillac plans is one that already has support in the House, which passed an income surtax in its health care reform bill on people who make more than $500,000 (Bendavid, 11/13).

Bloomberg reports that, also while speaking at the summit, Orszag said he sees a health care reform bill passing by the end of the year, but he "wouldn't say whether the White House supports" applying Medicare taxes to capital gains. "'We have to see the package as a whole,' he said"  (Donmoyer and Jensen, 11/13).

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This article was reprinted from khn.org with permission from the Henry J. Kaiser Family Foundation. Kaiser Health News, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonpartisan health care policy research organization unaffiliated with Kaiser Permanente.