Tax showdown ahead on health reform

NEW YORK (CNNMoney.com) -- Democrats in the House and Senate are on the same page when it comes to health reform. They want it.

They even agree on some of the biggest ticket items in bills that they will be combining when they return from their holiday in January.

But there are a couple of areas where the head-butting could be fierce. Key among them: Taxes.

Here are a few of the ways the two chambers differ in their thinking:

The House and Senate both have provisions that would tax high-income households more to pay for reform. But they do so very differently.

The House leans on them heavily. It would impose a 5.4% surtax on a taxpayer's adjusted gross income over $500,000 ($1 million for couples filing jointly). The surtax would go into effect in 2011 and is estimated to raise $460 billion by 2019. The income thresholds would not adjust for inflation, so over time the tax would capture more and more taxpayers.

Critics of the surtax say it would not help reduce health care costs or spending, goals that have taken a backseat to insuring more Americans.

The surtax isn't likely to make it into a final piece of legislation because it doesn't have sufficient support in the Senate, where there are no votes to spare.

But in an apparent nod to the House's preference to tax the rich, the Senate bill would impose a higher Medicare tax on an individual's income over $200,000 ($250,000 for couples). The increase would start in 2013, and is estimated to raise $87 billion by 2019.

Currently, the Medicare payroll tax is 2.9% on all wages -- with the worker and his employer each paying 1.45%. Under the Senate bill, these high-income workers would pay 2.35%. (See correction.)

Supporters of the tax increase say it would help the long-term funding of Medicare. But the Congressional Budget Office put the kibosh on that argument. You can't use the tax to help pay for health-care reform and long-term Medicare needs -- that's double-counting, the CBO said.

Critics of the payroll tax hike say, that like the House surtax, it won't curb health costs or spending.

If your company picks up most of your health-insurance tab, many think that benefit should be taxed at least somewhat, especially for very generous plans. Critics worry about the consequences of hiking taxes on workers.

The Senate tries to sidestep the issue by focusing the tax on insurers. Its bill would impose a 40% tax on insurers for the portion of employer health plans that exceed $8,500 for individual coverage and $23,000 for family coverage.

Higher thresholds would apply to plans that provide coverage to high-risk professions and to workers over 55.

The measure would go into effect in 2013 and would raise an estimated $149 billion by 2019.

Opponents maintain the tax would still ultimately be borne by workers, as insurers pass along the higher costs.

Supporters say the tax holds the promise of reducing the growth in health spending over time. Their reasoning: As the cost of plans grow more expensive, employers will instead opt for lower-cost options to avoid the tax.

And, the economic theory goes, once employers start spending less money on healthcare they will use the money saved to pay workers higher wages. The workers will then owe income tax on those higher wages, providing revenue to help pay for health reform.

Both the House and Senate bills have measures that would subsidize the cost of insurance for low- and middle-income families. But both also require that most Americans obtain coverage.

Those who fail to acquire adequate coverage under the House bill would be subject to a tax equal to the lesser of 2.5% of one's modified adjusted gross income, or the national average premium for single or family coverage, whichever is relevant.

Those who are claimed as dependents on a taxpayer's return would not be subject to the penalty themselves. But their parent or guardian would be responsible for providing them coverage. Parents may include their children up to age 26 on their insurance policy under the House bill.

The measure would go into effect in 2014 and raise an estimated $33 billion by 2019.

Under the Senate bill, those who fail to have adequate coverage would have to pay a penalty that would increase over time. "Generally, the penalty would start at $95 in 2014, $495 for 2015 and $750 for 2016 with indexing for inflation [thereafter]," according to a CCH Tax Briefing paper.

The measure, in conjunction with a penalty on employers who fail to meet the requirements under the bill to help workers get coverage, is estimated to raise $36 billion by 2019.

For those who would rather look good than avoid skin cancer, they would face a 10% excise tax on indoor tanning services under the Senate bill. The provision would go into effect in 2011 and raise an estimated $2.7 billion by 2019.

The Senate bill includes another revenue raiser affecting individuals that is not included in the House bill. Currently, you can deduct medical expenses that exceed 7.5% of adjusted gross income. The Senate bill, would raise that threshold to 10% for anyone under 65 starting in 2013, and would apply to seniors 65 and older by 2017.

The measure would raise an estimated $15.2 billion by 2019.

Correction: An earlier version of this article incorrectly stated what the increased Medicare payroll tax rate would be for individuals.