House Dems Finalize Plan To Fund Health Care Reform With Surtax

On Friday, House Democrats finalized a proposal for a surtax on high-income U.S. residents that would raise an estimated $550 billion over 10 years to help offset the cost of reforming the health care system, the New York Times reports (Herszenhorn, New York Times, 7/11).

The approximately $1 trillion House reform bill, which is expected to be released on Monday, would be funded by between $500 billion and $600 billion in Medicare payment cuts, in addition to the new surtax, House Ways and Means Committee Chair Charles Rangel (D-N.Y.) said on Friday (Wayne/Schatz, CQ Today, 7/10).

The income tax rate for U.S. households with incomes of at least $350,000 annually and individuals with incomes of at least $280,000 annually is currently 35% but is expected to increase to 39.6% in 2010, when former President George W. Bush's tax cuts are scheduled to expire (Montgomery, Washington Post, 7/11).

Under the House plan, couples with incomes more than $350,000 would pay an additional 1% in income taxes, those with incomes over $500,000 would pay an additional 2% and those with incomes over $1 million would pay an extra 3%. In addition, the surtax could be raised to 2%, 3% and 5% for the three levels, respectively, as soon as 2013.

However, the increase would not go into effect if other means of funding were discovered, such as budget savings exceeding expectations, according to the Wall Street Journal (Hitt/Vaughan, Wall Street Journal, 7/11).

Last week, the House Ways and Means Committee outlined changes to Medicare that would result in net savings of $152 billion over 10 years, but committee members did not comment on how they plan to reach the $500 billion to $600 billion in savings to fund the remainder of their reform proposal.

"We're still working on the savings side," Rep. Chris Van Hollen (D-Md.) said (CQ Today, 7/10).

Support

An aide to House Speaker Nancy Pelosi (D-Calif.) said that Pelosi and other House leaders support the idea of surtaxes to fund health reform (New York Times, 7/11).

Rep. Allyson Schwartz (D-Pa.) said that although higher-income families would pay higher income taxes, they could also experience substantially lower health insurance premiums if the proposal "works right." She added that Ways and Means Committee Democrats were hesitant to implement such taxes but that they hope to eventually rework the tax code (Washington Post, 7/11).

On CNN's "State of the Union" on Sunday, HHS Secretary Kathleen Sebelius said that President Obama would prefer to fund an overhaul by limiting itemized tax deductions for high-income U.S. residents, in addition to finding savings in the health care system. However, she said that "everything is on the table and discussions are under way" (Alexander, Reuters, 7/12). She added, "I think that it's one of the ideas that will be discussed in the long run" (Isenstadt, Politico, 7/13).

Criticism

The surtax proposal received criticism from both sides of the aisle. Democrats in the fiscally conservative House Blue Dog Coalition raised doubts about the surtax, the Washington Times reports (Haberkorn, Washington Times, 7/11).

Rep. Jason Altmire (D-Pa.) said, "I have a concern with going outside the health care system" to pay for reform. He added, "I feel like the House has moved this issue so far to the left we've taken ourselves out of the discussion entirely" (CQ Today, 7/11).

Blue Dogs met with House leaders on Friday to discuss their concerns regarding the cost of reform, but said no deals could be reached (Washington Times, 7/11).

Rep. Gerald Connolly (D-Va.), who is not a member of the Blue Dogs, said, "I'm not persuaded that any sort of tax increase is needed," adding, "The jury is still out on what, if anything, we have to do for revenue enhancement" (Wall Street Journal, 7/11).

Robert Carroll, a senior fellow at the Tax Foundation, said that the surtax -- along with other federal tax adjustments -- could bring total income taxes to at least 45% for most U.S. residents whose incomes are at least $350,000. He said, "One has to decide whether the health care reform package they're talking about is worth imposing such high tax rates on the most productive members of society."

Republicans said that the surtax specifically would hurt small-business owners, who typically report business income on their personal tax returns.

Michael Steel, spokesperson for House Minority Leader John Boehner (R-Ohio), said, "In the middle of a serious recession, with unemployment nearing double digits nationwide, the last thing we need is a tax increase on small businesses, which will cost the American economy even more jobs" (Washington Post, 7/11).

Senate

On Sunday, Senate Democratic leaders "signaled reservations" about the surtax proposal, The Hill reports.

Senate Majority Whip Richard Durbin (D-Ill.) said, "I think we are going to have a different approach" to funding an overhaul.

Sen. Charles Schumer (D-N.Y.) said, "Obviously, the surcharge has a benefit; it meets the president's goal of not taxing anybody below $250,000." However, he added, "I think to negotiate in public when there are many different options is not going to be very helpful, so I'm not going to do that" (Yager, The Hill, 7/12).

Senate Budget Committee Chair Kent Conrad (D-N.D.) said, "I don't think the House proposal as I've heard it will be what's part of the final package."

Senate Minority Whip Jon Kyl (R-Ariz.) said that the surtax "would be exactly the wrong thing to do any time, but especially when we're in the middle of a recession" (Hunt/Dick, CongressDaily, 7/12). He added, "It would be a job killer" (Silvassy, CQ Today, 7/12).

On Sunday on NBC's "Meet the Press," Schumer said that he expects the Senate Finance Committee to produce a proposal for funding reform by the end of the week (CongressDaily, 7/12).