U.S. House May Include Surtax on Wealthy in Health-Care Package

By Ryan J. Donmoyer

July 7 (Bloomberg) -- House Ways and Means Committee members are likely to propose a surtax on high-income Americans to help pay for an overhaul of the health-care system, according to people familiar with the plan.

The tax would be similar to, yet much smaller than, a surtax proposed in 2007 by Ways and Means Committee Chairman Charles Rangel, a person familiar with the committee’s talks said. That plan would have added at least a 4 percent levy on incomes exceeding $200,000, and was projected to reap as much as $832 billion over 10 years.

Two people familiar with closed-door talks by committee Democrats said a House bill probably will include a surtax on incomes exceeding $250,000, as Congress seeks ways to pay for changes to a health-care system that accounts for almost 18 percent of the U.S. economy. By targeting wealthier Americans, a surtax may hold more appeal for House Democrats than a Senate proposal to tax some employer-provided health benefits.

“The surtax is obviously more attractive to Democrats in the House because it’s more progressive, which they find attractive in and of itself,” said Paul Van de Water, a senior fellow at the Washington-based Center on Budget and Policy Priorities, a research group focused on policies affecting low- and moderate-income families.

Supporters on the Ways and Means Committee include Representative Lloyd Doggett, a Texas Democrat who backs including a surtax among revenue-raising measures in a health- care package, Doggett spokeswoman Sarah Dohl said.

Republicans in Congress, and some Senate Democrats, are likely to fight moves to increase tax rates, said Clinton Stretch, who analyzes tax legislation at Deloitte Tax LLP, a Washington consulting firm.

Republican Opposition

“This will be a point of discomfort for moderate or conservative Democrats” in the Senate, he said. “It will be an anathema for Republicans.”

The possibility of raising taxes on top earners surfaced last month as a revenue option for members of Rangel’s committee, and the people familiar with the talks cautioned that no agreement has been reached. A Senate plan to tax the value of employee benefits that exceed coverage for federal workers may generate as much as $418.5 billion over 10 years, though talks are focused on proposals that would raise considerably less.

Rangel’s 2007 plan would have added a 4 percent tax on incomes exceeding $200,000 and an extra 0.6 percent levy on those making more than $500,000. A House plan this year may include lower rates and higher income thresholds, a person familiar with the plan said.

Tax Increase

A surtax proposal would force President Barack Obama to decide whether he is willing to add the levy on top of higher income-tax rates for top earners that he wants to take effect in 2011. Obama has promised that he won’t increase taxes on Americans earning less than $250,000 and said he will delay increases for high-income earners until 2011.

Obama hasn’t commented on the possibility of a surtax, and the White House had no comment on specific proposals. The president has proposed limiting itemized deductions for high- income taxpayers.

Obama has said he doesn’t want to tax health-insurance benefits, while refusing to rule out that possibility if it helps seal approval for an overall health package.

Congressional Democrats have said they may need to raise taxes by at least half a trillion dollars to pay for the health- care revamp, in addition to savings of almost as much through steps such as reducing Medicare subsidies and cutting prices the elderly pay for medications.

‘Everything’ on Table

Matthew Beck, a spokesman for the Ways and Means Committee, declined to comment about the surtax option, saying only that “everything’s on the table.”

Michael Steel, a spokesman for House Minority Leader John Boehner of Ohio, the chamber’s top-ranking Republican, said his party would oppose a surtax because it would “disproportionately” affect small businesses, whose owners often include business income in amounts taxed on their individual returns.

“With unemployment nearing double digits, we need to help small businesses grow and create jobs, not squeeze the life out of them with even higher taxes,” Steel said.

According to the Tax Policy Center, a Washington research group, about 4.3 million of 150 million U.S. households filing tax returns will earn more than $200,000 this year.

A surtax 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.

Different Objectives

Eugene Steuerle, vice president of the Peter G. Peterson Foundation, a non-profit federal budget watchdog group, said the surtax and a levy on benefits reflect “very different objectives.” A surtax would make the tax code more progressive, and cutting tax incentives for employer-provided insurance is intended to discourage unnecessary use of medical services, he said.

Mark Weinberger, vice chairman of New York-based Ernst & Young LLP, said that while Republicans won’t back higher tax rates, House Democrats at this point don’t need bipartisan support.

“Strategically, what Democrats have to do is just move the ball forward,” Weinberger said. “Whatever revenue raisers they have in the House or Senate bills will change throughout the process.”

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net .

Last Updated: July 7, 2009 06:23 EDT

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