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Grassley Requests More Information on Medicare Payroll Tax

By Jane Norman, CQ HealthBeat Associate Editor

November 24, 2009 – The top Republican on the Senate Finance Committee said on Tuesday that he wants more information about an increase of the Medicare payroll tax included in the Senate version of the health care overhaul.

"If Democratic leaders want to increase Medicare taxes, the revenue should go to Medicare, with Medicare's Hospital Insurance Trust Fund scheduled to run dry in eight years and the payroll tax having been established to fund the Medicare program, not for other government spending," said Charles E. Grassley of Iowa.

Grassley said he has written to the Joint Committee on Taxation asking which taxpayers would be affected by the new tax, particularly those earning less than $200,000 a year.

Under the bill (HR 3590), individuals earning more than $200,000 and married couples making more than $250,000 would see a slightly higher payroll tax rate to help fund the overhaul—1.95 percent compared with 1.45 percent now. The tax increase would raise about $59 billion over the next 10 years, according to the Joint Committee on Taxation.

Because he wanted to pare back the impact of an excise tax tied to high-cost insurance plans included in the bill, Senate Majority Leader Harry Reid, D-Nev., added the 0.5 percent increase in the payroll tax that funds Medicare. It would mean that the tax would take into account marital status, so working couples whose combined income tops the threshold may have to adjust their tax withholding or face additional payments when they file their returns.

The tax would not start until 2013, and the income levels that trigger it would not be indexed for inflation. As a result, many people whose income in current dollars is below the threshold would have to pay the tax, even if their real purchasing power does not increase.

Grassley said he wants to know if the Medicare payroll tax increase could become like the alternative minimum tax. He said the alternative minimum tax did not affect many taxpayers in the beginning but later became a major tax burden because it, too, was not indexed for inflation.

Grassley said he also fears the bill could result in an inadvertent marriage penalty, and so he has asked the committee for information on the impact on married couples.

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