National Journal's CongressDaily
January 6, 2010 Wednesday
Dems Eye Investment Income As Pay-For
by Peter Cohn
Democrats are taking a second look at subjecting investment income earned by wealthy Americans to the Medicare payroll tax, as they hunt for healthcare revenues to whittle down an excise tax on high-cost insurance plans in the Senate version.
The Senate proposal has come under fire from labor unions and progressive groups. Robert Reich, who was Labor secretary in the Clinton administration, came out against the tax plan today in a conference call.
"The choice here is very clear: Congress should put the cost of healthcare reform on the wealthiest Americans ... rather than working Americans who are struggling harder than ever," Reich said.
The Senate provision in its current form would raise taxes on millions of middle-class Americans by 2019, according to the Joint Committee on Taxation, breaking pledge President Obama said at the time he would leave individuals earning less than $200,000, or households with less than $250,000 in annual income, untouched. He also said he would not tax health benefits to pay for reform, as his opponent Sen.John McCain, R-Ariz., proposed.
But Obama in recent days has forcefully advocated for the excise tax as among the best options for holding down healthcare cost-growth over the long term.
The idea of applying the Medicare payroll tax to investment gains and other "unearned income," as advocates of the plan call it, has been circulating for months. It was put forward by Citizens for Tax Justice, a progressive group, over the summer, and Sen.Debbie Stabenow, D-Mich., raised it in initial Senate Finance Committee deliberations. It came up again in early November as Senate Majority Leader Reid was cobbling together a combined Senate bill.
Reid eventually settled on a straight increase in the 1.45 percent tax paid by employees to 2.35 percent on individuals with more than $200,000 in adjusted gross income and families making more than $250,000.
Rep.Chris Van Hollen, D-Md., assistant to House Speaker Pelosi, said a similar approach could be taken in final House-Senate negotiations, while other sources said the House also may be willing to sign off on a version of Stabenow's plan.
Currently, the wealthiest earners contribute a much smaller percentage of their income to payroll taxes for Medicare and Social Security -- about 1.6 percent in 2006 versus 9.4 percent for the middle class, according to CBO.
Stabenow obtained a score of her plan in early December that gave some indication of how much revenue may be available. According to JCT, applying the existing 1.45 percent payroll tax to investment income, including capital gains, taxable interest, dividends, estate and trust income and income from rents, royalties, S corporations and passive partnership income, to those earning above the $200,000/$250,000 thresholds would raise $111 billion over a decade.
It would be phased in over the first $40,000 of investment income, and begin Jan. 15. Arguably that date would have to be moved back, decreasing the amount of revenue gained. But increasing the overall tax by 0.9 percent, as the Senate bill would do, could make up some lost ground. Simply increasing the tax on current income, applied only to wages and beginning in 2013 as in the Senate bill, would raise about $87 billion.
Rep.Joe Courtney, D-Conn., who has led the charge in the House against the excise tax, declined to handicap the outcome on the call with Reich but pledged to keep up the fight. "The Obama campaign was not bashful at all about going after McCain's throat on that issue," he said, adding "this is a plan that has great political risk for the Democrats."