YOUR TAXES : IT CAME FROM WASHINGTON : Senior Surtax : One of the most controversial changes in tax law--the Medicare surcharge--has nothing to do with reform.

Congress was hailed when it passed the Medicare Catastrophic Coverage Act, the major tax change enacted in 1988. Some called the bill, sponsored by Reps. Pete Stark (D-Oakland) and Willis D. Gradison (R-Ohio), the most important medical measure since the 1965 bill creating Medicare. Stark, however, sometimes characterizes his legislation in less grandiose terms.

“I call it the Gradison bill,” Stark said. “And Gradison calls it the Stark bill.”

Stark’s quip is a sign that the bill’s authors realize just how controversial the new law has become. The act’s provisions--unlimited coverage of hospitalization costs, for example--are still popular. However, critics say the financing mechanism--a surtax on older Americans--is unfair, a charge that Stark and other supporters of the act deny.

Faced with the new charges, many seniors will alter their investment strategy to avoid the Medicare surtax, according to some financial analysts.

The surtax, a 15% fee on federal income tax payments, affects taxpayers over age 65. The new fee works like this: In 1989, all taxpayers eligible for Medicare will have to pay an additional $22.50 for each $150 of federal income tax they pay. The fee rises to $37.50 for each $150 of tax liability in 1990 and up to $42 for each $150 by 1993.

The maximum surtax, which will typically be paid by older taxpayers with incomes exceeding $70,000, is $800 for a single person and $1,600 for a couple. Everyone eligible for Medicare, including affluent taxpayers who choose not to use the Medicare program, must pay the surtax. Most seniors will pay the fee on 1989 income when they file returns next year.

The fees are designed to pay for increased coverage. As of 1989, Medicare covers hospital care for an unlimited number of days. Previously, Medicare fully covered only the first 60 days of hospitalization. Also, Medicare now covers costs for up to 150 days of post-hospitalization care in a nursing facility. Before 1989, the limit was 100 days.

“Before hospitalization was expanded, people were being financially ruined or losing all their assets to pay bills,” Stark said. “Sometimes, doctors weren’t being paid.”

Stark said most seniors--those with modest or average incomes--support the new act.

“It’s a very few rich Americans--those who will pay $600 or $700 (in Medicare fees) a year who are complaining. They just don’t want to pay more money. . . . The lowest-income people pay nothing and the upper-income people pay the most--and that’s fair.”

Stark acknowledged that some federal government retirees object to the new fees because they had unlimited hospitalization coverage before the enactment of the new measures. However, he said they should be required to contribute to the program.

“There’s been some backlash against this,” he said. “It’s a relatively small group of dissidents who are very vocal.”

However, the legislative affairs director for the National Assn. of Retired Federal Employees said opposition to the surtax is broad and deep. The association, which represents about 500,000 retirees, has been meeting with other organizations to orchestrate a campaign against the fees. The coalition of about 40 groups--the National Council on Aging, the Retired Officers Assn. and the National Committee to Preserve Social Security and Medicare among them--represents about 18 million people, said Judy Park, legislative director for National Assn. of Retired Federal Employees.

The influential American Assn. of Retired Persons is critical of the surtax, but continues to support the act in its present form.

“No one is out there saying, ‘Repeal or scrap the bill,’ ” Park said, “but there is almost universal opposition to the current financing mechanism and Congress needs to re-evaluate it.”

Park said the financing is unfair because seniors are singled out.

“If they want to look at a surtax on the entire tax-paying population, that’s fine,” she said. “But this (act) is an absolute turnabout from the way Social Security and Medicare has been financed all along.”

The surtax, Park said, discourages savings among seniors because interest earnings on savings is taxable. Park said a number of financial advisers have told her that a large number of seniors are suddenly interested in new investment strategies.

Among those recording the surging interest is Jean Kahl, an investment adviser at Washington-based Ferris, Baker Watts. Kahl said older investors in the capital were among the first to respond to the surtax because many track tax law closely.

“My clients invest on a regular basis and most are now investing to get tax-free income,” Kahl said. “If you have income from taxable investments, it makes sense to shift to instruments like (tax-free) municipal bonds.”

Kahl said Congress may resist efforts to have the act revised in 1989. However, the pressure for changes will be in 1990, when the surtax will increase by about 10%, she said.