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Some Democrats Want to Double the Medicare Surtax to 6.9%

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What You Need to Know

  • Bloomberg says the Biden administration might propose holding it at 3.8%.
  • Republicans have proposed eliminating it.
  • One senator has proposed putting all of the NIIT revenue in the Medicare hospitalization plan trust fund.

Bloomberg reported last week that one key part of an upcoming  Biden administration tax package could be a section holding the “Medicare surtax,” or “net investment income tax” (NIIT), at 3.8%.

Many tax policy specialists have done the math and noted that keeping the NIIT as is, and increasing the total federal tax rate for capital gains, for taxpayers with annual income over $1 million, to 43.4% — 39.6% plus 3.8%.

For insurance agents and others following the Affordable Care Act saga, the news about the NIIT represents the start of a new ACA story, with the plot hinging on whether the NIIT will really stay the same, or whether some unexpected force will cause it to rise or fall.

The NIIT Is Already Big

The NIIT increases the tax bills of individuals and couples who have both a high-level of income and a high level of investment income.

The NIIT affects high-income taxpayers with a significant amount of taxable investment income.

This year, 5.9 million U.S. taxpayers could make $36.6 billion in NIIT payments, according to the Joint Committee on Taxation.

in 2018, the latest year for which detailed information is available, the NIIT provided $30 billion in federal revenue. That was equal to about 1.8% of all federal individual tax obligations, and it was almost half as big as the $65 billion stream of revenue coming from the federal self-employment tax.

Republicans and Democrats have been fighting over the proper rate for the NIIT ever since 2010, when when former President Barack Obama signed the two bills that created the ACA package and brought the ACA system to life.

Critics of the NIIT have argued that, because the “threshold amounts,” or income exclusions, are not indexed for inflation, the provision is starting to affect investors who are only moderately affluent.

Some Republicans in Congress have introduced bills that have included NIIT repeal provisions.

Some Democrats have introduced bills that used NIIT rate increases as sources of new federal revenue.

NIIT Details

Tax advisors who work with high-income clients might run into the NIIT every day. Other financial professionals may not hear much about it.

Here are five more things to know about the NIIT, for financial professionals

1. It came in to the Affordable Care Act through the Health Care and Education Reconciliation Act of 2010 (HCERA).

The ACA is made up of two separate laws: the well-known Patient Protection and Affordable Care Act of 2010 (PPACA), and the little-known HCERA.

HCERA Section 1402(a) created the NIIT by adding Section 1411 to the Internal Revenue Code. HCERA drafters hoped the NIIT would offset part of the cost of ACA health insurance access expansion programs.

One implication of the NIIT being part of HCERA: The NIIT could be tougher than the ACA itself.

Attorneys general from Texas and other states that object to the ACA are fighting to have the U.S. Supreme Court declare that PPACA is unconstitutional, because it includes an unconstitutional requirement for some people own what the government classifies as a minimum level of health coverage.

It’s not clear whether the suits involved, Texas v. California and California v. Texas, would affect both PPACA and HCERA, or just PPACA.

The U.S. Supreme Court could declare PPACA to be unconstitutional in the next few weeks while leaving HCERA, and the NIIT, in place.

2. Section 1411 sets “statutory threshold amounts” for four different types of taxpayers who are subject to the NIIT requirements.

  • Single, or head of household: $200,000
  • Married, filing jointly: $250,000
  • Married, filing separately: $125,000
  • Qualifying widow or widower, with a child: $250,000

3. Republicans have repeatedly tried to kill the NIIT.

In October 2020, for example, Rep. Bruce Westerman, R-Ark., introduced H.R. 8527, the “Fair Care Act of 2020″ bill.

Section 415 of that bill would repeal the NIIT.

Earlier, in 2017, Sen. Rand Paul, R-Ky., included a NIIT-repeal provision in S. 554, a budget reconciliation bill, and Rep. Jim Jordan included an identical provision in a companion bill, H.R. 1436.

4. Some Democrats see increasing the NIIT as a way to pay for a Medicare for All program or other major health coverage expansion program.

Rep. Rosa DeLauro, D-Conn., introduced one version of the “Medicare for America Act of 2019″ bill in December 2018, as H.R. 7339, and a second version in May 2019, as H.R. 2452.

Both versions of the bill — which do not use the term “Medicare for All,” but which call for establishing a “Medicare for America health program to provide for comprehensive health coverage for all Americans” — would increase the NIIT to 6.9%.

H.R. 7339 had just one cosponsor, but H.R. 2452 had 25 cosponsors.

DeLauro is now the House Appropriations Committee chair.

Neera Tanden, who was President Joe Biden’s original pick to be the director of his Office of Management and Budget, appeared in the Medicare for America bill launch press release as a supporter.

When groups like Americans for Tax Reform were lobbying to block Tanden’s nomination, one point critics made was that Tanden had supported increasing the NIIT rate to 6.9%.

Other Democrats have proposed even bigger increases in the NIIT rate as sources of revenue.

Sen. Bernie Sanders, a Vermont independent who caucuses with the Democrats, included a provision increasing the NIIT rate to 10% in S. 478, a Social Security Expansion Act bill introduced in February 2019.

Sanders is now the Senate Budget Committee chair.

Rep. Peter DeFazio, D-Ore., put an identical provision in a companion to Sanders’ bill, H.R. 1170.

5. Some lawmakers want to keep the NIIT and require that NIIT revenue be used for specific, designated purposes.

The government now can use NIIT revenue for any purpose.

Sen. Bob Casey, D-Pa., proposed in S. 1422, a bill introduced in May 2019, that all NIIT revenue flow in to the Federal Hospital Insurance Trust Fund — the trust fund that supports the Medicare Part A hospitalization program.

Sanders and DeFazio wanted to use their expanded versions of the NIIT to increase the solvency of both the Medicare and Social Security trust funds.

The White House (Photo: Shutterstock)