Economists on Thursday criticized a Senate proposal to raise Medicare payroll taxes on high earners to help fund a health-care overhaul. But the idea was welcomed by some House Democrats as a viable solution to help foot the bill for the health re-write.
Senate Majority Leader Harry Reid (D., Nev.) added the tax, which would generate $54 billion over 10 years, to his sweeping health legislation to help minimize its impact on the deficit.
Under the plan, most taxpayers would continue to pay a 1.45% Medicare hospital-insurance tax, but single people earning more than $200,000 and married couples earning more than $250,000 would be taxed at 1.95%.
Henry Aaron, a senior fellow at the left-leaning Brookings Institution, said the extra tax on wages could influence high-income people to take their pay in stock or other forms of compensation, rather than wages.
"I would rather see Congress rely on broad tax instruments like the income tax than on payroll taxes," said Aaron.
Aaron applauded a separate provision in the Senate bill that would tax high-cost insurance plans, with the aim of prodding employers and workers to choose cheaper coverage options. Reid added the Medicare tax in part so he could afford to scale back the tax on pricey insurance plans, which is opposed by some Democrats.
Conservatives said the proposed Medicare tax increase undermines the liberal argument that Medicare is a social-insurance program, not a vehicle to redistribute wealth.
"The argument that it is not a welfare program, but a social insurance program, has been demolished," said J.D. Foster, a senior fellow at the conservative Heritage Foundation.
Under the bill, employers would collect the extra 0.5% on wages exceeding $200,000, just as they now withhold Medicare taxes and remit them to the IRS. Companies wouldn't be responsible for determining whether a worker's combined income with his or her spouse made them subject to the tax.
Instead, some employees would have to remit additional Medicare taxes to the IRS when they filed income-tax returns.
Legislation passed by the House earlier this month would impose a 5.4% surtax on wealthy households to pay for increased benefits in its plan. House Democrats remain opposed to the Senate's excise tax on so-called Cadillac insurance plans. But they welcomed the Medicare payroll-tax increase as an idea worth exploring.
"I've always felt, if we're going to do entitlement reform, we have to do a better job of means-testing the program," said Rep. Ron Kind (D., Wis.). "Are we really going to have Warren Buffett pay the same and get the same benefit as everybody else?"
Rep. Sander Levin (D., Mich.) dismissed criticism that an additional Medicare tax would take money from the rich in exchange for no benefit. "The benefits people would be getting include a sounder health-care system, and improved security for the Medicare program," he said.
On the Cadillac plan tax, the Communications Workers of America union won a last-minute addition that would allow workers who repair telephone and electric lines to be treated as high-risk workers.
Those and other high-risk workers in the bill, including police, firefighters and coal-miners, would be able to purchase more coverage before the 40% excise tax kicks in.
A $2,500 cap on annual contributions to flexible-spending accounts is also among tax changes proposed to pay for the Senate bill. The accounts have become a popular way to use pre-tax dollars to pay for doctor's office visits, medicines and other out-of-pocket expenses.
Because the cap isn't indexed to inflation, flexible-spending accounts would become less and less useful over time as a way to plan for medical costs.
-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@dowjones.com