Tax expansion could pay for healthcare overhaul

Reporting from Washington —  Democratic congressional leaders are considering a new strategy to help finance their ambitious healthcare plan -- applying the Medicare payroll tax not just to wages but to capital gains, dividends and other forms of unearned income.

The idea, discussed Wednesday in a marathon meeting at the White House, could placate labor leaders who bitterly oppose President Obama’s plan to tax high-end insurance policies that cover many union members. It could also help shore up Medicare’s shaky finances, and the burden of the new tax would fall primarily on affluent Americans, not the beleaguered middle class.

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FOR THE RECORD:
Healthcare tax: An article in Thursday’s Section A about healthcare legislation and a possible new tax on investment income cited an analysis by the Tax Policy Center, which projected that taxpayers in 2010 would report long-term capital gains and dividends totaling about $500 million. The correct total is $500 billion. —

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But the concept also carries political risks: Many older Americans, one of the nation’s most potent voting blocs, could see their tax bills rise because they often depend on savings and investment income in retirement.

The new tax on investment income is part of the narrowing range of ideas being considered as Obama and his allies push to wrap up work on far-reaching legislation to expand healthcare coverage, rein in insurance industry abuses and curb healthcare costs.

House and Senate Democratic leaders worked throughout the day and into the night Wednesday in talks with Obama and his top lieutenants.

At Obama’s request, senior Democratic lawmakers surrendered their BlackBerries and cellphones when they began meeting in the Cabinet Room at the White House about 10:30 a.m. Wednesday, according to a senior Democratic aide.

Obama asked the lawmakers to remain in the room until they reached an agreement in principle on the major sticking points separating the House and Senate. They broke in the late afternoon so House members could return to the Capitol for a series of votes, but then resumed talks until about 6:40 p.m.

“Today we made significant progress in bridging the remaining gaps between the two health insurance reform bills,” Obama, House Speaker Nancy Pelosi (D-San Francisco) and Senate Majority Leader Harry Reid (D-Nev.) said in a statement. “We’re encouraged and energized.”

It was the first face-to-face meeting of the New Year of White House and congressional leaders. Obama’s involvement in completing his signature domestic initiative was welcomed.

“This president’s participation in the details is an indication of how critically important he thinks it is for the American people, to do what he said he would do, and that is to be sure that every American has access to affordable, quality healthcare,” said House Majority Leader Steny H. Hoyer (D-Md.).

Among the most politically sensitive questions to be resolved is how the bill’s new spending will be offset, to keep it in line with Obama’s promise that revamping healthcare would not add to the deficit.

Obama and Senate Democrats have wanted a big part of the financing to be a tax on expensive health insurance plans, but that is opposed by labor leaders who say many workers gave up wage hikes in favor of richer benefits.

Democrats had begun considering ways to scale back the tax on “Cadillac” plans -- either by raising the value of the plans that would be affected or by carving out an exception for union-negotiated plans. But any such changes would reduce revenue.

Expanding the Medicare tax could take up the slack.

“It’s a very progressive way to raise money,” said Roberton Williams, an analyst at the nonpartisan Tax Policy Center. “It would protect union workers. It would definitely target people who are better-off, but it could hit some of the elderly who are relying on savings to get by.”

The Medicare trust fund is now financed with a 2.9% tax on wages -- half paid by employees, half by employers.

The Senate healthcare bill includes two major tax increases. The tax on high-end plans would raise $149 billion by levying a 40% excise tax on insurance companies that offer plans costing more than $8,500 for individuals and $23,000 for families. It also would hike the employee share of the Medicare payroll tax rate to 2.35% for individuals with more than $200,000 in income and couples with more than $250,000.

The House version of the bill would raise revenue by slapping a 5.4% income surtax on very wealthy people -- individuals with more than $500,000 in income and couples with more than $1 million.

The Medicare tax is emerging as an avenue for compromise between taxing wealthy people and taxing high-end plans. The focus on upper-income people and unearned income bridges the House and Senate approaches, said House Ways and Means Chairman Charles B. Rangel (D-N.Y.).

That appeals even to some of the caucus’ most liberal members. And in a letter to congressional leaders, the powerful Service Employees International Union expressed support for the proposal.

According to projections by the Tax Policy Center, about 9 million tax filers will report long-term capital gains in 2010 totaling about $500 million. More than half of that money will go to people with more than $1 million in income. But for those in lower-income brackets -- such as retirees living on savings -- their investment earnings can be an important resource.

For the small number of people with less than $10,000 in income who will report long-term capital gains, the average amount reported will be nearly $2,800, the center projects.

It is not clear whether the Democratic healthcare negotiators would limit the scope of any Medicare tax on investments. But when the liberal group Citizens for Tax Justice recently drafted such a proposal, it provided an exemption for the first $50,000 of such income for the elderly.

Even with that exemption, the group estimated that its proposal would raise $40.5 billion a year.

Under current law, the top rate on capital gains and dividend income is 15%. That is scheduled to rise to 20% in 2011 if the George W. Bush-era tax cuts are allowed to expire.

Raising the tax burden on investors further could be a risky move for Democrats at a time when they are scrambling to shore up the economy and respond to voters’ anxiety about high unemployment.

Republicans are already arguing that expanding the Medicare tax to investment income would be harmful in a struggling economy.

“If the goal of the congressional Democratic negotiators is to keep the economy in perpetual recession, having the Medicare tax apply to investment is a darn good way to do it,” said Ryan Ellis, tax policy director for the conservative group Americans for Tax Reform.

But Democrats like Rep. Robert E. Andrews of New Jersey, who chairs the health subcommittee of the House Education and Labor Committee, favor the proposal because it would make the flat-rate Medicare tax more progressive.

“Those who benefit most from increased economic growth are the wealthiest among us,” Andrews said. “I think it’s most fair to ask them to bear the short-term burden of the program.”

janet.hook@latimes.com

noam.levey@latimes.com