July 11 (Bloomberg) -- Democratic lawmakers in the U.S. House of Representatives want to increase taxes on the highest- earning American families to help pay for an overhaul of the nation’s health-care system.

Legislation to be unveiled on July 13 would raise $540 billion over the next decade by setting a 1 percent surtax on couples with more than $350,000 in annual income, said Representative Charles Rangel, chairman of the tax-writing Ways and Means Committee. Higher rates would take effect for those earning $500,000 and $1 million, Rangel said.

The New York Democrat said his panel decided this was the simplest means of funding the biggest health-care revamp in more than four decades after considering alternatives ranging from increasing Medicare levies to taxing sugary drinks.

The surtax is the “best way” to do it, Rangel told reporters yesterday at the U.S. Capitol, adding that it would take effect in 2011. Republicans disagreed, saying the measure would hit small business owners and depress job growth.

The announcement capped a week of closed-door meetings during which lawmakers have struggled to decide how to pay for the legislation, which may cost as much as $1 trillion. There was a fresh round of talks yesterday as Democratic leaders tried to quell a rebellion over the cost of health-care legislation by dozens of members of their own party.

‘Strong Reservations’

In a letter to party leaders, 40 members of the Blue Dog Coalition, a group of self-proclaimed fiscally conservative Democrats, raised “strong reservations” about the draft of a bill they said would fail to sufficiently reduce health-care costs and may hurt doctors and hospitals.

The protest forced party leaders to postpone yesterday’s scheduled release of the draft, as well as a House Energy and Commerce Committee debate that was expected to begin July 13.

The potential defection of so many Democratic lawmakers posed a serious challenge because to pass the legislation in the House, Democrats would need Republican support, which is considered unlikely, according to a senior Democratic aide.

The objections from Blue Dog Democrats prompted the legislation’s authors to revise the measure, said the aide, speaking on condition of anonymity.

Democrats hold a 255-178 advantage over Republicans in the House.

Accelerating Rates

The plan the Ways and Means panel agreed on yesterday would require individuals to begin paying the surtax when their income hits $280,000, with higher rates taking effect when those incomes reach $400,000, and again when they hit $800,000.

It would be levied on adjusted gross income, before deductions for items such as mortgage interest and charitable gifts. Regular income taxes are assessed after such write-offs.

While the surtax would go into effect in 2011, Representative Allyson Schwartz of Pennsylvania said it would increase if projected savings that Democrats expect the legislation to achieve aren’t realized.

“We were discussing doing it at a lower rate, then building to a higher rate in later years if we don’t get enough savings,” Schwartz said.

According to data from the Internal Revenue Service for 2006, the most recent year available, there were 943,399 tax returns filed out of a total of 139 million that reported adjusted gross income of more than $500,000. Another 3.1 million reported income of between $200,000 and $500,000; the IRS doesn’t break out the number earning above $350,000.

‘No Concept’

The proposal drew fire from Republicans, who said the higher taxes would hurt the people who create the most jobs.

“We need small businesses and entrepreneurs to create new jobs and jumpstart economic growth,” Senator Jon Kyl of Arizona said in a statement. “But they can’t if they are saddled with an onerous surtax on their business income.”

The plan “shows once again that there are some who have no concept of how private industry creates jobs and grows the economy,” Kyl said.

The momentum for the revamp of the health-care system has slowed with disagreements hardening in Congress over how to finance the plan. Senate lawmakers from both parties have urged leaders to abandon their goal of bringing the legislation to a vote in the next month. They’ve clashed over issues such as whether to impose the surtax on wealthy Americans and whether to tax employee-provided health benefits.

Obama’s Top Priority

President Barack Obama said yesterday that passing a comprehensive overhaul of the system is his “highest legislative priority” and he expects it will be achieved.

“I’m confident that we’re going to get it done,” the president said in a news conference in L’Aquila, Italy, after a three-day summit of the Group of Eight nations. “People are “getting hammered” by rising costs, he said.

“I’m also looking at the federal budget,” Obama said. The only way to reduce the deficit is to “corral and contain” health costs.

In their letter on July 9, the Blue Dog Democrats said cost-cutting should be “much more aggressive” in the legislation.

Referring to Obama’s push to extend coverage to the estimated 46 million uninsured Americans, the group said: “We cannot ‘add’ new consumers to a broken system.”

To contact the reporters on this story: Ryan J. Donmoyer at rdonmoyer@bloomberg.net; James Rowley in Washington at Jarowley3@bloomberg.net.

Last Updated: July 11, 2009 00:01 EDT