taxes

Health care reform and your taxes

Friday, July 24
Posted 11 a.m. EDT

The best reality show right now is playing out on Capitol Hill as congress works on health care reform.

Almost everyone agrees that that country's health care system is broken. But there is much less agreement on how to fix and how to pay for it.

Of course, payment will be in some form of taxation. Ideas have included so-called "sin taxes" on sugar-laden beverages, reducing or eliminating the tax break employers get for offering health care to workers, reducing the itemized tax deductions allowed higher-income filers and, the current front-runner, taxing the wealthy a little bit more.

The surtax on the wealthy has already made it through the House Ways and Means Committee. Under that proposal, in 2011 a 5.4 percent income surtax would be imposed on couples making more than $1 million a year.

But others earning less also would face smaller surtax charges. Couples making more than $350,000 would have to pay a surtax of 1 percent tax and those making more than $500,000 would face a 1.5 percent surtax.

Adding a new tax to folks who aren't millionaires, however, didn't sit too well with many members of Congress, and House leaders have let it be known they will adjust the legislation accordingly.

OK with Obama: During his primetime press conference Wednesday night, President Obama indicated that raising the tax threshold was OK by him: "To me, that meets my principle" that the cost of overhauling health care is "not being shouldered by families who are already having a tough time."

The Joint Committee on Taxation number-crunchers say that only the wealthiest 1.2 percent of taxpayers would pay the surcharge. Still, many in Congress, including the fiscally conservative Blue Dog Coalition of Democrats, are not convinced that the surtax is the way to go. They argue that it could cost small businesses.

A Washington, D.C., group, however, says otherwise. The nonpartisan, nonprofit Citizens for Tax Justice, or CTJ, says its research shows only around 4 percent to 5 percent of taxpayers who get more than half their income from small businesses they own or operate would pay the surcharge in 2011.

CTJ's full report also includes state-by-state estimates of the effect of the surtax.

Speaking of states: The other issue raised by opponents of the millionaire surtax to fund health care reform is how it would affect individuals' overall tax burden.

Another Washington, D.C.-based nonprofit, The Tax Foundation, ran its own numbers and found that if the maximum 5.4 percent surtax is enacted, the wealthiest taxpayers in 39 states would face a combined federal-state rate of more than 50 percent.

"That means government would be taking more than half of every additional dollar from high-income taxpayers," said Tax Foundation President Scott Hodge.

That's not an issue for me here in Texas. Not only am I nowhere near making $1 million a year, there's no state income tax in the Lone Star State. The same no-income-tax status also applies to residents of Alaska, Florida, Nevada, South Dakota, Washington and Wyoming. Two other states, New Hampshire and Tennessee, tax only dividend and interest income.

But for well-paid folks in most of the United States, the surtax could produce a costly combined tax bite. The hardest hit, according to Tax Foundation calculations, would be taxpayers in Oregon, Hawaii, New York, California and Rhode Island. The tax research group has a list of the effect on all states in its Fiscal Fact 178 look at the surtax.

More time for more work: Despite Obama's urging that Congress get a plan in place before recessing for most of August, the House and Senate leadership have acknowledged that timetable won't be met.

Part of the reason, aside from lawmakers not wanting to give up their annual late-summer break, is that there are a lot of committees involved.

Two panels, the Health, Employment, Labor and Pensions Committee, or HELP, and the Senate Finance Committee, get to have a say. HELP has already completed its work. The Finance Committee members are still hashing things out.

Across the Hill, three House panels are part of the process: The tax-writing Ways and Means panel has approved its bill, the one with the surtax. The Energy and Commerce and Education and Labor committees, however, still have work to do.

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