REFORM: Increasing Medicare Payroll Tax Musters Support
The Center on Budget and Policy Priorities concludes that the idea of raising the Medicare payroll tax "on high-wage earners would represent a sound and well-targeted way of paying for health reform."
Senate Majority Leader Harry Reid is reportedly considering raising the Medicare payroll tax to 1.75 percent (up from 1.45 percent) for individuals earning more than $200,000 a year and couples earning more than $250,000 a year. Reid needs to fill a health reform financing gap if he raises the threshold for taxing the so-called "Cadillac" plans to $8,500 for individual plans and $23,000 for couples (up from $8,000 to $21,000, respectively). Scaling back the reach of that excise tax would please labor unions, among other groups, who have expressed opposition. The Medicare alternative has quickly gained popularity.
The CBPP report has several interesting conclusions:
Additional revenues are essential for crafting a health reform bill that provides adequate tax credits to make health coverage affordable to low- and moderate-income families, requires people to have insurance, and avoids adding to the federal deficit. By one estimate, a 0.5 percentage point increase in the employee share of the Medicare tax would raise $54 billion over ten years.
The proposal would target those best able to pay. Although distributional estimates are not available, the proposal is likely to affect only those in the top 5 percent of the income distribution.
Raising the Medicare payroll tax would extend the life of Medicare's Hospital Insurance trust fund. Under current law, the HI trust fund is projected to become insolvent in 2017; the proposal would likely push back the date of insolvency by at least four to five years.
The study concluded that a "modest increase in the Medicare payroll tax" may go a long way in funding health reform. AFL-CIO President Richard Trumka argues that this is "far preferable to taxing the plans." The Senate is still waiting on CBO estimates -- which will significantly shape the final version of the Senate bill.