Democrats want to tax high earners to protect Medicare solvency

Senate Democrats want to boost taxes on some high earners and use the money to extend the solvency of Medicare, the latest step in the party’s election-year attempt to craft a scaled-back version of the economic package that collapsed last year, Democratic aides told The Associated Press.

Democrats expect to submit legislative language on their Medicare plan to the Senate’s parliamentarian in the next few days, the aides said. It was yet another sign that Majority Leader Chuck Schumer (D-NY) and Sen. Joe Manchin (D-WV) could be edging toward a compromise the party hopes to push through Congress this summer over solid Republican opposition. Manchin scuttled last year’s bill.

Under the latest proposal, people earning more than $400,000 a year and couples making more than $500,000 would have to pay a 3.8% tax on their earnings from tax-advantaged businesses called pass throughs. Until now, many of them have been using a loophole to avoid paying that levy.

That would raise an estimated $203 billion over a decade, which Democrats say would be used to delay until 2031 a shortfall in the Medicare trust fund that pays for hospital care. That fund is currently projected to start running out of money in 2028, three years earlier.

Most U.S. businesses are pass throughs, which include partnerships and sole proprietorships and range from one-person law practices to some large companies. Owners count the profits as income when they pay individual income taxes, but such companies do not pay corporate taxes — meaning they avoid paying two levels of taxation.

Democrats this week also sent the parliamentarian a separate 190-page piece of the emerging Schumer-Manchin compromise aimed at lowering prescription drug costs for patients and the government. Provisions include requiring Medicare to negotiate drug prices, limiting beneficiaries’ out-of-pocket costs to $2,000 annually and increasing federal subsidies for copays and premiums for some low-income people.

With November elections for control of Congress approaching, Democrats hope the two proposals will be a remedy for a campaign season that so far looks bleak. Republicans are favored to win a majority in the House and could do the same in the Senate.

Democrats say both plans will show voters they are battling to curb health care costs and protect the widely popular Medicare program, positions they say will be dangerous for Republicans to oppose. Polls show widespread public alarm over recent months’ historically high inflation rates, supply chain problems and other economic issues that along with President Joe Biden’s dismal popularity ratings are pushing voters Republicans’ way, the GOP says.

Asked for comment, a spokesperson for Senate Minority Leader Mitch McConnell noted that the Kentucky Republican told constituents this week that Democrats would make inflation “considerably worse” by reviving their economic bill.

“From an economic point of view, I can’t think of anything they haven’t screwed up,” McConnell said.

Schumer and Manchin have been bargaining privately for weeks on a package aides say could include around $500 billion in spending and tax credits, more than paid for with about $1 trillion in revenue and other savings. Schumer has described the talks as productive but acknowledged that some issues remain unresolved.

Energy and environment programs, corporate taxes, IRS budget increases to strengthen tax enforcement and a renewal of soon-to-expire federal subsidies for people buying health insurance under President Barack Obama’s health care law are also under discussion, aides say.

It remains uncertain what will emerge from the talks. The aides described the latest proposals and status of negotiations only on condition of anonymity because they were not authorized to disclose the information by name.

The suggestions of progress were emerging seven months after Manchin derailed a roughly $2 trillion, 10-year social and environment bill, dealing a stunning blow to a cornerstone of Biden’s domestic agenda.

The Democratic-run House approved the measure in November, but Manchin abruptly announced he could not support the legislation because of its cost and his worries that it would fuel inflation. Similar provisions lowering pharmaceutical prices and raising taxes on some upper-income people were in that bill.

The West Virginian’s backing remains crucial in the 50-50 Senate. Democrats are using special procedures that would let them pass the pared-down package over expected unanimous GOP opposition with the tie-breaking vote of Vice President Kamala Harris.

Democrats are expected to unanimously back the Medicare solvency and prescription drug plans, one Democratic aide said. Manchin spokesperson Sam Runyon said the lawmaker “has always supported pathways” to keep Medicare solvent, and said his backing for lowering pharmaceutical costs “has never been in question.”

Senate parliamentarian Elizabeth MacDonough will have to certify that the new bill’s provisions adhere to the chamber’s budget rules. Last year, she ruled that language making it easier for immigrants to remain in the U.S. had to be removed because it violated prohibitions against using the special procedures to enact significant policy changes.

Medicare has 64 million beneficiaries. Its trust fund covering hospital services, called Part A, is financed largely from taxes deducted from peoples’ paychecks.

That trust fund gained two years of solvency, until 2028, in last month’s report by the program’s board of trustees. It attributed the improvement to the economy’s recovery from the coronavirus pandemic-spawned recession.

But both Medicare and Social Security face long-range financing problems, and the trustees suggested that lawmakers act “sooner rather than later” to strengthen them. Without congressional action, Medicare’s hospital trust fund would be able to pay only 90% of its costs in 2028 and less thereafter, the trustees said.

The proposal to increase taxes on some wealthier Americans would raise $203 billion over the coming decade, according to information examined by the AP that Congress’ Joint Committee on Taxation provided to Senate Democrats. Federal actuaries told the Democrats that such financing would delay the trust fund’s shortfall until 2031, another document showed.