Obama’s Planned Tax Would Hit Highest Earners Hardest (Update2)

By Ryan Donmoyer and Aliza Marcus

Feb. 26 (Bloomberg) -- President Barack Obama is proposing the first tax increase on high-income earners in 16 years to help pay for sweeping health-care reforms, asking the U.S. Congress to cap the tax deductions for affluent Americans.

The move would reverse a course set by former President George W. Bush of lowering taxes for high-income people, the cornerstone of his administration’s economic program.

“It’s a clear repudiation of Bush’s policy,” said Peter Morici, an economist at the University of Maryland in College Park. “It’s more Obama Robin Hood.”

Obama proposes spending $634 billion to overhaul the U.S. health-care system, partly paid for by limiting tax deductions for couples making more than $250,000 a year, an administration official said.

He will seek the money, to be spent over 10 years, in his first budget request to Congress today. About half would come from changes to Medicare, the health plan for the elderly, and the rest from the tax revisions, the official said. Limiting deductions for upper-income taxpayers is projected to generate $318 billion over 10 years, the official said.

Republican Reaction

Representative Mike Pence of Indiana, the No. 3 Republican leader in the House, said Obama can expect a wall of opposition to his proposed tax increase. Roughly half of Americans earning $250,000 are small-business owners, and the proposed increase will stifle the troubled economy, he said.

“There will be overwhelming opposition from the American people and House Republicans to the idea that we should raise taxes during a recession,” Pence said in an interview. “Raising taxes in a recession is not a strategy for recovery.”

Representative Jeb Hensarling, a Texas Republican, said in an e-mail, “You cannot help the job seeker by punishing the job creator. This is exactly the wrong time to be raising taxes on anyone, not the least of which are our small businesses that create new jobs in America.”

The administration also proposes in its budget plan to use revenue from the sale of greenhouse-gas emission permits to help finance a tax credit for some workers and offset higher energy costs for low- and middle-income people.

Everyone Gets Covered

The health-care overhaul, as outlined by Obama during his campaign and since then, would expand the current system to make sure everyone gets medical coverage. The president urged Congress in a speech two days ago to revamp health care this year, saying medical costs have “weighed down our economy and the conscience of our nation long enough.” Obama has said he won’t let a struggling economy and swelling budget deficit slow his plans.

“That he’s willing to continue forward with what he said was a must do is very positive,” said Gail Wilensky, an economist and former Medicare administrator who also was an adviser to President George H.W. Bush.

The $634 billion alone is too little for “full-blown reform,” she said, an opinion shared by other analysts. Wilensky put a price tag of as much as $1.5 trillion on an overhaul of the system.

“This is just a down payment,” said Edwin Park, a health- policy analyst at the Center on Budget and Policy Priorities, a Washington-based group focused on issues affecting low- and moderate-income families. “He’s leaving the hard stuff to Congress.”

Insurers Strike Back

The insurance industry began its offensive immediately.

The proposed cuts in a program known as Medicare Advantage “must be based on the assumption that millions of seniors would lose important benefits and pay far more for their health care,” said Robert Zirkelbach, a spokesman for America’s Health Insurance Plans, the industry trade group in Washington.

U.S. government spending on Medicare and Medicaid will reach $721 billion this year, or about 28 percent of all public and private health-care spending, according to a report by the Centers for Medicare and Medicaid Services, the agency in charge of the two programs.

The budget proposes to save $175 billion over 10 years by changing how Medicare pays private insurers such as UnitedHealth Group Inc. and Humana Inc. that provide coverage for the elderly. About 10.5 million elderly Americans receive coverage through those Advantage plans.

Private insurers now are paid an average of 14 percent more than it costs Medicare to provide benefits directly, according to government estimates, and Obama pledged during his presidential campaign to cut back on the payments by as much as $15 billion a year.

Better Patient Care

Obama would also pay for part of the health-care reserve fund, as it is being called, by linking Medicare hospital reimbursements to better patient care. By reducing hospital readmissions and improving initial disease treatment, Medicare would save more than $20 billion over the 10-year period, the official said.

Other savings would come from Medicaid, the health program for low-income individuals and families.

The shift in the tax burden to help pay for the program would mean wealthy earners would see the value of some deductions reduced. For earners in the top 35 percent bracket, itemized deductions would lose 23.3 percent of their current value. If Obama reinstates the top tax rate of 39.6 percent in 2011 as he has said he would and kept the limitation on deductions, such write-offs would be worth 30 percent less to top earners.

‘Unaffordable’ System

“You have a health-care system that is unaffordable,” said Robert Laszewski, president of Health Policy and Strategy Associates in Washington. “If their solution is to pay for half of the cost of a new health-care plan with tax increases, they are going to have more of them.”

Obama also wants to introduce changes so generic versions of drugs made through biotechnology can be introduced to the market more quickly, the official said.

Biologically based medicines with combined sales of $34.2 billion are due to lose patent protections in the next eight years, according to data compiled by Medco Health Solutions Inc., the largest U.S. manager of employee drug plans.

The list of drugs that could be replaced by cheaper generics include some of biggest sellers for pharmaceutical companies, such as Johnson & Johnson’s Remicade, which generated $3.75 billion last year; Amgen Inc.’s Aranesp, with $3.14 billion in sales; and Genentech Inc.’s cancer drugs Avastin, Herceptin and Rituxan.

Senate Majority Leader Harry Reid of Nevada told reporters that lawmakers expect to start working on health care before August and “do something significant” by year-end.

To contact the reporters on this story: Ryan Donmoyer in Washington at rdonmoyer@bloomber.net ; Aliza Marcus in Washington at amarcus8@bloomberg.net .

Last Updated: February 26, 2009 10:40 EST

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