Health-Care Plan Would Add Surtax On Wealthy
House Democrats Propose to Expand Insurance Coverage

By Lori Montgomery and Ceci Connolly
Washington Post Staff Writers
Wednesday, July 15, 2009

House Democrats announced a plan yesterday that would force the richest 2 million U.S. taxpayers to shoulder much of the cost of an expansion of the nation's health-care system, by imposing a surtax of as much as 5.4 percent on income above $350,000 a year.

The House proposal aims to extend insurance coverage to 37 million Americans over the next decade, covering more people through Medicaid and providing subsidies to help others meet a new federal mandate to purchase insurance. Democratic aides said the proposal would cost more than $1.2 trillion over the next 10 years, and would ensure that 97 percent of Americans were enrolled in a health plan by 2015.

About half of the cost would be covered by reducing spending on federal health programs, primarily Medicare, which serves the elderly and the disabled. But much of the rest of the money would come from a new tax on families earning more than $350,000 a year and individuals earning more than $280,000. The taxes, which would take effect in 2011, would affect about 2.1 million taxpayers, the nonprofit Tax Policy Center projected.

The surtax would start at 1 percent and rise to 5.4 percent on income exceeding $1 million. Combined with the expiration next year of tax cuts enacted during the Bush administration, the surtax would drive the top federal tax rate to 45 percent, the highest level since lawmakers rewrote the tax code in 1986.

House leaders defended the plan by saying it targets those most able to pay -- the wealthiest 1.2 percent of households -- while honoring President Obama's pledge to protect the middle class from higher taxes.

Obama issued a statement praising the House plan. At a time when health-care costs are "crushing businesses and families and placing an unsustainable burden on governments," he said, "key committees in the House of Representatives have engaged in unprecedented cooperation to produce a health-care proposal that will lower costs, provide better care for patients and ensure fair treatment of consumers by the health-care industry."

But the plan has drawn sharp attacks from Republicans and is already creating friction with Democrats in the Senate.

"Tax is a four-letter word" with voters, said Sen. Ben Nelson (D-Neb.). Even families not ranking in the top 1 percent of earners "hope they're going to be there someday," he said. "So they don't necessarily think it's fair."

Senate negotiators have all but abandoned plans to directly tax the wealthy and are focusing instead on an array of smaller, more narrowly targeted revenue measures that would raise money from drug and insurance companies, as well as individuals and corporations. A tax on employer-provided health benefits remains part of that discussion, but Sen. Kent Conrad (D-N.D.), who is promoting a tax on the most generous 1 percent of private plans, conceded yesterday that such a proposal is "a very tough sell."

House leaders said the surtax on the wealthy in their plan offers their best chance to push a bill through the House by the end of the month, meeting Obama's deadline and building momentum for his top domestic priority.

"That's where the votes are," said Rep. Charles B. Rangel (D-N.Y.), chairman of the House Ways and Means Committee.

Republicans criticized the surtax as a job-killing tax increase that would fall disproportionately on small businesses, whose owners often report earnings on their personal tax returns. "You can't tax the job creators and expect them to create jobs," said House Minority Leader John A. Boehner (Ohio).

Under pressure from the White House to complete weeks of talks aimed at crafting a bipartisan bill, Senate Finance Chairman Max Baucus (D-Mont.) conducted a final round of meetings yesterday in hopes of producing legislation by week's end. Conrad cautioned that combining a finance package with a separate measure written by the Senate health committee could take far longer than the three weeks remaining before the Senate begins its August recess. But senior Democrats in Congress and the White House said they are growing less concerned about passing a bill before the break, and argued that Senate Finance Committee approval would send a strong signal that health-care reform can be achieved this year.

The House plans to press ahead with its proposal with the goal of working out the differences between the two chambers in a House-Senate conference later this year. The two chambers are far apart on issues including new taxes and the creation of a government-sponsored insurance plan known as a public option, but House leaders focused yesterday on what they see as the historic achievement of crafting a health-care plan that they think can win House approval.

"This legislation is landmark legislation, and a defining moment for our country," said House Energy and Commerce Chairman Henry A. Waxman (D-Calif.). "We are going to accomplish what many people have felt wouldn't come in our lifetime."

The new health system envisioned by House leaders would require individuals to carry insurance and force businesses to help pay for it. It also would take an aggressive stance toward the insurance industry, prohibiting "discriminatory practices" such as refusing to sell policies to individuals who are already sick or excluding certain treatments from coverage.

While the industry has expressed a willingness to accept such restrictions, it is opposed to the public option, which would create a program to compete directly with private insurers. Under the House measure, the public option would pay hospitals at Medicare rates and doctors slightly more, which many providers say would not be enough to cover their costs.

The House bill would expand insurance coverage by increasing Medicaid eligibility and delivering tax credits to people earning as much as 400 percent of the poverty level, or about $43,000 a year for an individual. Small businesses and individuals who had trouble buying insurance would be able to shop for plans through new purchasing groups dubbed "exchanges." Individuals who did not purchase insurance by 2013 would face a penalty of 2.5 percent of their income, and employers that did not provide coverage to their workers would be fined as much as 8 percent of their payroll, a provision the CBO estimates would generate $30 billion a year.

Yesterday, the CBO estimated that the House coverage plan would cost $1 trillion over the next decade, with most major provisions taking effect in 2013. But CBO Director Douglas Elmendorf cautioned in a blog posting that the agency will not have a final cost estimate until it receives more information about changes to Medicare and Medicaid, as well details of the tax package.

The House proposes to raise about $37 billion by changing the corporate tax code, but those provisions would be dwarfed by the surtax on the wealthy, which is projected to raise $544 billion over the next decade. Initially, the surtax would add 1 percent to the tax rate on income exceeding $350,000, 1.5 percent on income exceeding $500,000 and 5.4 percent on income exceeding $1 million. But the lower rates could rise again if the cost of health-care expansion exceeded expectations, to 2 percent and 3 percent respectively.

Staff writer Shailagh Murray contributed to this report.

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