Negotiations for comprehensive health care reform are moving into high gear on Capitol Hill. One of the most difficult questions for lawmakers is how to pay for health care reform. Every proposed revenue raiser (aka, tax increase) has generated controversy and it is unclear which ones will make their way into a final bill.

Surtax

One of the most controversial revenue raisers is a proposal in the House to impose a surtax on higher-income individuals. A one percent surtax would apply to married couples filing jointly with modified adjusted gross income (MAGI) that exceeds $350,000 but does not exceed $500,000; a 1.5 percent rate would apply to a couple’s modified AGI that exceeds $500,000 but does not exceed $1 million; and a 5.4 percent rate would apply to a couple’s modified AGI that exceeds $1 million. Lower rates would apply to single individuals.

Democratic leaders in the House have indicated they are open to raising the thresholds of the surtax if cost savings are achieved in other areas.  However, the surtax appears to remain their chief revenue raiser for health care reform.

Excise tax

The Senate Finance Committee’s chief revenue raiser would be a new excise tax on high-dollar health insurance plans. The proposed 40 percent excise tax would apply to single insurance coverage above $8,000 and $21,000 for family coverage. The SFC approved higher thresholds for individuals working in public safety and high-risk jobs.

Other revenue raisers

Revenue can be raised from other sources but the amounts would be much less than from a surtax or an excise tax on high-dollar health insurance plans. For example, the SFC approved capping annual contributions to a health flexible spending arrangement (FSA) at $2,500. The SFC also voted to raise the threshold for the itemized medical expense deduction from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI for regular income tax purposes. Individuals age 65 and older (and their spouses) would be exempt from the increase.

Planning

The uncertainty over revenue raisers complicates tax planning. Taxpayers also need to prepare for the expected increase in the top two individual marginal tax rates after 2010.

Please contact our office if you have any questions about health care reform. We’ll keep you posted of developments.