Whom to tax for health reform? : The Senate majority leader considers whether to target rich workers or ‘Cadillac’ insurance policies.

Pressing to begin the Senate’s landmark floor debate on healthcare legislation this week -- and to finish by the end of the year -- Majority Leader Harry Reid (D-Nev.) is considering new ways to fund the bill by raising the payroll taxes that upper-income workers pay for Medicare.

Reid is studying the idea, senior Democratic aides say, because of criticism of a plan approved by the Senate Finance Committee that would impose new taxes on insurance companies that offer expensive healthcare plans.

But Reid is meeting resistance from centrist Democrats who believe the tax on expensive insurance plans could rein in the growth of health costs overall, while a payroll tax hike would not.

The competing tax proposals pose the most momentous decision facing Reid as he writes the version of the health bill that he will take to the Senate floor.


That work is being done in private deliberations that are arguably the most important and least visible stage of the legislative process so far.

Indeed, the Medicare tax increase has not been included in either of the two bills approved by the Senate’s finance and health committees, which Reid is trying to meld into a single measure.

By Friday, Reid hopes to hold a crucial procedural vote on a motion to formally bring the bill to the floor for debate.

Sixty votes will be required to overcome Republican efforts to block it with a filibuster.

The House this month passed a $1-trillion version of the healthcare bill, which included a surtax on individuals earning more than $500,000 a year.

That idea is not well received in the more conservative Senate, where the Finance Committee instead approved a 40% excise tax on insurance companies that offer “Cadillac” health plans that cost more than $8,000 for individuals.

Labor unions and other critics say the Cadillac tax would hit too many middle-income consumers whose health premiums are high because they live in high-cost areas, not because the plans offer luxury benefits.

Reid, who is facing a tough reelection campaign with the strong backing of organized labor, is exploring ways to scale back the Cadillac tax. He is considering the Medicare payroll tax hike to make up for the revenue that would be lost if the Cadillac tax applied to fewer plans.


Under the current system of financing the Medicare hospital insurance trust fund, employers and employees pay a tax of 1.45% on wages.

Reid is reportedly considering increasing the rate about half a percentage point for workers earning more than $250,000 a year.

Some Democrats and analysts see the proposals as a way to offset the cost of the healthcare bill, shore up the Medicare trust fund -- and keep the burden of both efforts on upper-income people.

Another approach under consideration would expand the tax to cover unearned income, such as capital gains, not just wages.


The idea of raising payroll taxes on employers as well as employees may be a tough sell in the current recession.

And the plan is meeting resistance from Democrats who worry that it would do nothing to help reduce the growth of healthcare costs -- a major aim of the overhaul effort.

The Cadillac tax, by contrast, might help control the growth of health costs by discouraging insurers and employers from offering lavish health plans, they say.

“If you really want to change policy, you discourage taxpayer subsidies for Cadillac, Mercedes and Ferrari plans,” said Sen. Bill Nelson (D-Fla.), a member of the Finance Committee.