Democrats risk taxing the wealthy for healthcare

Reporting from Washington — 

Amid all of the uncertainties about how healthcare legislation would affect each American, one thing is clear: The more affluent would pay higher taxes.

Embracing the progressive -- and sometimes politically risky -- principle that the cost of carrying out public policies should fall to the well-off more than the disadvantaged, both the House and Senate bills would place new taxes on the wealthy to help pay for expanded insurance coverage.

But the bills differ on who counts as rich and how much they would pay.

Under the House bill, couples with more than $1 million in income would pay an additional surtax of as much as 5.4%. The Senate bill would hit families of more modest wealth -- those making more than $250,000 -- with a payroll tax hike of 0.5%.

The fact that both bills include tax increases marks a striking shift in Democrats’ political calculus. Not many years ago, when the party sought to shed its liberal reputation, Democrats treated any tax increase as political dynamite.

Now, however, concern about the deficit is mounting and party members are less fearful of taxing the wealthy, said Sen. John D. Rockefeller IV (D-W.Va.), a multimillionaire who also would favor means-testing for Medicare premiums. “It’s not a complicated idea,” he said.

In a recent Associated Press poll, 57% of those surveyed favored taxing people who earn more than $250,000 a year to pay for the healthcare overhaul. Of a variety of financing options tested in the survey, that tax was the only idea supported by a majority.

“Taxing the rich works because they’ve got the money,” said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. But, he warned, “you can’t go to that well over and over again.”

Many other provisions of the two healthcare bills would affect families’ pocketbooks, for better and worse. For example, people who have very generous insurance plans would probably face higher costs or reduced benefits under the Senate plan. It would tax insurance companies that offer such plans, and the cost probably would be passed on to workers.

The proposed tax increases offer a target for Republicans who say the healthcare overhaul burnishes Democrats’ reputation as a party of tax-and-spend liberals.

“The voters spoke loud and clear at the ballot box earlier this month -- they are sick and tired of all the reckless spending and big-government interference coming out of Washington,” Republican National Committee Chairman Michael Steele said, referring to some high-profile Democratic losses in the off-year elections.

“Harry Reid’s bill is exactly what the voters don’t want, and Senate Democrats who let this bill even come up for debate will pay a price on election day next year,” he said.

Sen. Judd Gregg of New Hampshire, the budget committee’s ranking Republican, predicted that the bill’s tax proposals would not be approved, so the cost of the legislation would instead be added to the deficit. “It’s just not going to happen,” he said of the tax hikes.

When President Obama proposed his healthcare plan early this year, he said he would insist that it not add to the deficit, promising to offset new spending with tax hikes or spending cuts in other areas.

His principal proposal to pay for the initiative was a limit on the deductions that upper-income taxpayers could take, including the home mortgage interest and charitable donation deductions.

That proposal met with stiff opposition from two powerful lobbies in Washington: home builders and charities. That sent Democrats searching for other sources of revenues.

The House bill would raise $460 billion over 10 years with its 5.4% surtax on income in excess of $500,000 a year for individuals, or $1 million for a couple, beginning in 2011. According to an analysis by the Joint Tax Committee, the tax would affect about 0.3% of all households, some 445,000 filers.

The Senate bill would increase the Medicare payroll tax on wages of couples who make more than $250,000, and individuals with more than $200,000 in wage income. In 2013, the rate would rise from the present 1.45% to 1.95%.

The increase would affect an estimated 1.3% of all tax filers, according to a Senate aide. It would raise an estimated $54 billion in revenue over 10 years.

The Senate approach is less progressive than the House bill because the payroll tax applies only to wage income -- not to dividends, capital gains and other non-wage income that usually fattens the wallets of wealthier people.

Although both bills would raise revenues from a very narrow slice of the population, many analysts and lawmakers worry that neither tax increase would advance one of the principal goals of the health overhaul: slowing the growth of healthcare spending.

That is why the Senate bill also includes the 40% excise tax on companies that offer high-end insurance plans -- those that cost $8,500 in annual premiums for individuals and $23,000 for families. Proponents argue that would not just raise revenues but also curb costs by discouraging companies from offering expensive plans.

It is not clear how many people will be affected by that tax, but critics warned it would not hit just luxury plans, but also those for middle-class workers whose premium costs are high because they live in high-cost states.

A recent study by the Commonwealth Fund projected that the average premium for family coverage in 2015 would be nearly $20,000 in high-cost states. To address those concerns, the Senate bill sets the threshold $3,000 above that for certain states and for plans that cover workers in high-risk professions.

Richard Trumka, president of the AFL-CIO, said that was a step in the right direction, but that labor would seek to kill the provision. “We continue to believe that a tax on working families’ benefits is the wrong way to finance healthcare,” he said.

janet.hook@latimes.com