Health bill would put 3.8% tax on investment income

WASHINGTON — Democratic congressional leaders would raise to 3.8 percent the Obama administration's proposed new Medicare tax on investment income to generate an estimated $210 billion to help fund a health-care overhaul plan.

The rate is higher than the 2.9 percent President Barack Obama proposed in February. The new tax would apply to income from interest, dividends, annuities, royalties, capital gains and rents for individuals who earn more than $200,000 annually and joint filers reporting more than $250,000, according to the legislation.

"It's a big deal," said Clint Stretch, a tax analyst for the consulting firm Deloitte Tax LLC. "It extends dramatically the reach of the Medicare hospital insurance tax."

The first-time Medicare tax on investment income would start in 2013. It would push tax rates on capital gains and dividends that year to 23.8 percent for high-income people if Congress goes along with Obama's proposal to let those rates rise to 20 percent in 2011 from the current 15 percent. It would be the highest rate for long-term capital gains since 1997.

The nonpartisan staff of the congressional Joint Committee on Taxation estimated the Medicare tax on investments would generate more than $30 billion annually, or $210.2 billion from 2013 through 2019. It would be the biggest tax increase in the bill and account for half of the $409 billion in total revenue.

Overall tax rates on income from interest, annuities and royalties would rise to as much as 43.4 percent. The Medicare tax wouldn't apply to income in tax-deferred retirement accounts such as 401(k) plans.

Obama proposed extending Medicare taxes to investment income as lawmakers sought to merge the House health care plan, which included a 5.4 percent income surtax on millionaires, with the Senate proposal, which sought to tax expensive health insurance plans over the objections of labor unions.

The final plan announced Thursday delays the proposed 40 percent tax on high-value insurance plans until 2018, from 2013 in earlier proposals. It also increases the cost threshold affected by the tax, applying it to the portions of plans worth more than $10,200 for individuals and $27,500 for families. The Senate bill would have imposed the tax at thresholds of $8,500 and $23,000.

In further years, the tax on high-cost plans would affect more insurance plans than earlier proposed, as the plan would reduce the inflation index for that provision.