Senate Leader Drawing Up Payroll Tax To Fund US Health Reform

by Leroy Baker, Tax-News.com, New York

20 November 2009

United States Senate Majority Leader Harry Reid is understood to be drawing up plans for a new payroll tax on high-income earners to help fund the health care reforms called for by President Obama.

According to reports citing Democrats familiar with the plans, Reid intends to introduce his own version of healthcare reform legislation that will be partly funded by a proposed increase in the 1.45% payroll tax used to fund the Medicare program. It is thought that Reid's bill would double this tax for those earning more than USD250,000 annually.

Reid is believed to be drafting his own healthcare proposals as an alternative to Sen. Max Baucus's "America's Healthy Future" bill, which has a 45% excise tax on expensive "Cadillac" health insurance plans at its heart and which was approved by the Senate Finance Committee last month.

As well as a revenue raiser, the excise tax proposal is designed to help lower the cost of healthcare provision – a major goal of Obama's healthcare reform policies – by discouraging health insurance firms from offering expensive gold-plated policies. But critics contend that the excise tax measure would affect middle-income families who are forced to pay for expensive healthcare insurance because they happen to live in a high-cost area. On the other hand, it can be argued that simply adding another tax on wages as Reid is proposing will do nothing to help reduce healthcare costs on its own.

However, the House of Representatives also favors additional taxation on the wealthy to fund healthcare reform, and has narrowly approved a bill which would impose a 5.4% surtax on annual income above USD500,000 for individuals and USD1m for couples. It is estimated that this will raise USD460.5bn over 10 years.

According to House Ways and Means Chairman Charles Rangel, the legislation will cover 96% of Americans by 2015 under updated health insurance provisions, while reducing the deficit by "tens of billions of dollars" over the next decade.

It is expected that the Senate debate on Reid's bill will commence in the coming days, and an early procedural motion could begin as early as November 20.

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