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There’s decent news on the Medicare front. Notably, the Hospital Insurance Trust Fund (HITF) that's used to pay Medicare Part A benefits for recipients. The HITF is expected to be solvent for longer. According to current projections from Medicare trustees, the HITF would be able to fully pay scheduled benefits until 2036, five years later than last year’s forecast. That’s because federal payroll taxes fund the HITF, and the number of covered workers who pay the taxes, and their average wages, are forecasted to be higher. The HITF is mainly funded by Medicare taxes. And currently, there are three Medicare taxes:
- First, a 1.45% Medicare tax is levied on both employees (through payroll tax withholding) and employers with respect to workers’ wages and salaries, with no cap on taxable earnings.
- Second, a 2.9% Medicare tax is imposed on people with self-employment earnings, again with no cap.
- Third, individuals pay an additional 0.9% Medicare surtax once their wages and/or self-employment income exceed $200,000 for single filers and $250,000 for joint filers. This extra 0.9% surtax does not hit employers.
Despite the good news, experts are always looking to shore up the HITF. Let’s look at ideas to raise revenues. Not surprisingly, they involve tax hikes.
1. President Biden wants to hit upper-income individuals with more taxes.
He would hike the current 0.9% Medicare surtax imposed on employees and self-employed people to 2.1% for taxpayers with over $400,000 of earned income.
2. He also wants to raise the net investment income tax rate from 3.8% to 5% on individuals with modified adjusted gross incomes over $400,000. The 3.8% NII tax now applies to singles with modified AGIs over $200,000, or $250,000 for joint filers. Biden would also expand the tax to cover more business income than it currently does.
3. Biden would also redirect NII tax revenues to Medicare’s HITF.
Though enacted under Obamacare, money from the NII tax has gone into general revenue for years.
4. Here’s a somewhat controversial idea set forth by some think tanks: Have workers pay Medicare tax on employer-paid health insurance.
Employer-paid health premiums are now excluded from an employee’s taxable wages. The tax exclusion for these health benefits is very costly, and either eliminating it or narrowing it can generate lots of revenue that can help support the HITF. One option is to subject all or part of the employer-paid insurance premiums to the 1.45% and 0.9% Medicare taxes paid by employees. A limited approach would impose these Medicare taxes only on employer-paid insurance of high earners.
5. Imposing an excise tax on sugary beverages has also been suggested.
For example, levying a federal excise tax of three cents per 12 ounces of sodas and other sugar-sweetened beverages and dedicating the revenues to the HITF.
Lawmakers have lots of time to flesh out revenue and cost-saving options to secure the HITF’s future. Let’s hope they don’t wait until the last minute to act.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
