House Democrats are considering options such as raising the payroll tax that funds Medicare and slapping a new "surtax" on wealthier households to help pay for a $1 trillion-plus healthcare overhaul bill, according to a document obtained by CongressDaily.
Lawmakers and aides cautioned that no decisions have been made, but the options distributed to Ways and Means Democrats provide a glimpse of the possible directions that chamber is headed in as it seeks $600 billion in new tax revenues to fund the bill.
Every one of House Ways and Means Chairman Charles Rangel's proposed options is controversial, and runs the risk of angering interest groups ranging from the small business lobby to the moribund newspaper industry. Rangel is considering a new $37.5 billion tax raised by denying deductions taken by pharmaceutical companies for prescription drug advertising expenses, for example.
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Rep. Earl Pomeroy, D-N.D., said he could see the merit in the proposal. "We believe that the high cost of prescription drug ads has made a much bigger contribution to drug companies' profits than it has been to public health," he said, although he added that "we're not looking for extra fights." [corrected from original]
Rep. Earl Blumenauer, D-Ore., said he opposed the idea. "It's not getting a lot of traction," he said. "If you are really concerned about the future of media when it is in freefall, what are the implications of doing that?"
Taxing employer-provided health coverage in excess of federal employee benefits is an option described, although clearly not the preferred one in the House. Unions oppose that plan, which has more momentum in the Senate.
The Ways and Means option would raise more than half the needed revenues from limiting the tax exclusion for employer-provided benefits to 110 percent of the actuarial model of the Federal Employee Health Benefit Blue Cross/Blue Shield standard option. Coverage excluded from tax would be limited to $17,240 for families and $6,800 for individuals beginning in 2013, indexed for inflation in future years with a 50-50 blend of general and medical inflationary increases. That option alone would raise $306 billion.
The Ways and Means paper assumes the entire $600 billion in new taxes would begin to take effect on Jan. 1, 2013. A 2 percent surtax on individuals earning more than $200,000 and households with $250,000 or more in adjusted gross income would raise $256 billion.
That would be in keeping with President Obama's pledge not to raise taxes on all but the wealthiest households, and the 2013 effective date assumes the nation would be out of recession. But many small-business owners are already chafing at seeing the top tax rates hiked to 36 percent and 39.6 percent in 2011 under Obama's budget plan.
Rangel's paper couples the 2 percent surtax with a 0.375 percent increase in the Medicare tax on both employers and employees, estimated to raise $344 billion -- also likely to cause problems with the small business lobby and perhaps liberal interest groups that argue it is a regressive tax. Currently, employers and employees each pay a 1.45 percent tax to fund Medicare; the 1993 budget bill repealed the cap on income subject to the Medicare tax.
The options paper appears to recognize that raising the Medicare tax might be politically untenable. If that is the case, as a fallback the Ways and Means document suggests a number of revenue-replacing options, including limiting the tax exclusion and a $200 billion proposal to add a new 3 percent payroll tax on employers' healthcare spending. The paper argues that employers would essentially come out even, because they would be saving money on employees' health care under the overhaul bill.
Blumenauer said he liked funding the plan through a payroll tax, although he did not specify if he favored a new tax or raising the Medicare tax. "For less than a couple of bucks a week out of your paycheck, you could ensure the stability of the current system and provide coverage to millions of uninsured Americans," said Blumenauer.
Two other options -- a value-added tax on goods and services, and a 0.65 percent increase in the Medicare tax -- each could potentially raise the entire $600 billion without having to tinker with other areas of the tax code.
The VAT idea was panned by retail industry groups and several lawmakers Tuesday. Ways and Means staff said based on prior estimates, a VAT of between 1 percent and 1.5 percent could raise the entire $600 billion; exempting sensitive items like housing, financial services, education and medical care would require a rate of 2 percent to 3 percent.
Blumenauer said that would be too high a tax on consumers and that discussion of a broad-based consumption tax ought instead to be taken up in the context of comprehensive tax reform.
Rep. Allyson Schwartz, D-Pa., plugged her own plan at Tuesday's meeting: a 10-cent tax on each 12-ounce container of a sugar-sweetened beverage like nondiet soda. That would raise $112 billion, the options paper said. "I was told by my dad not to drink sugary sodas my whole life, and I turned out all right," Schwartz said. "This [tax] would make it a real treat."
Increasing taxes on alcoholic beverages by $61.5 billion is on the paper as well, but it did not win much support from Ways and Means members Tuesday. Other options include a host of revenue-raisers included in Obama's budget plan, from international tax law changes to new insurance company taxes. A plan to limit the value of itemized deductions to 28 percent, estimated to raise $269 billion in Obama's budget, is not mentioned in the document. That proposal has run into harsh criticism from charities, homebuilders and others concerned about its impact.
This article appears in the June 20, 2009, edition of National Journal Daily.