Tax Policy Center Estimates Medicare Revenue Proposals
The Tax Policy Center (TPC) recently published a report on “Options for Increasing Medicare Revenues.” This report identifies 12 options to increase revenue in order to support the Medicare Hospital Insurance (HI) trust fund and finance rising federal health spending. These options, many of which we have discussed before, include increases to the Medicare payroll tax, individual income tax, corporate income tax, and other taxes. They would raise anywhere from $87 billion to over $1 trillion over a decade.
The Medicare HI trust fund is only five to seven years from insolvency. Total Medicare spending, which includes the cost of Medicare Parts B and D that are funded from general revenue, is projected to nearly double over the next decade. New revenues can be part of a solution – along with policies to lower health care costs – to improve the sustainability of federal health spending.
TPC Options to Increase Medicare Revenues
| Policy Option | Ten-Year Savings (2022-2031) |
|---|---|
| Medicare Tax Rates | |
| Increase HI tax by 1% | $1,024 billion |
| Increase HI tax by 1% for those above $200k/$250k | $221 billion |
| Increase HI tax by 1% for those above $400k/$500k | $117 billion |
| Individual Income Taxes | |
| Increase individual income tax rates by 1% | $977 billion |
| Increase individual income tax rates on ordinary incomes by 1% | $945 billion |
| Increase individual income tax rates for taxpayers in higher tax brackets by 1% | $444 billion |
| Broadening the Tax Base | |
| Limit health care tax exclusion at the 75th percentile of premiums | $376 billion |
| Repeal health care tax exclusion for HI payroll tax only | $414 billion |
| Close gap between the NIIT and SECA tax bases above $200k/$250k | $260 billion |
| Close gap between the NIIT and SECA tax bases above $400k/$500k | $238 billion |
| Other Taxes | |
| Increase corporate tax rate by 1% | $87 billion |
| Enact a 1% value-added tax with rebate to protect those in poverty from the tax | $997 billion |
| Memo: Ten-Year HI Trust Fund Deficit | $390 billion |
Source: Tax Policy Center.
TPC puts forward three options to raise the Medicare payroll tax rate – raising the 2.9 percent base rate on all income, increasing the 0.9 percent surtax above $200,000 of income ($250,000 for couples), or imposing a new surtax on earnings exceeding $400,000 ($500,000 for couples). Based on their numbers, the ten-year HI deficit could be closed with a 0.4 percentage point increase in the base rate or a 1.8 to 3.4 point increase on higher earners. Restoring 75-year solvency would require a 0.7 to 1.6 percentage point increase in the base rate or a much more significant increase in the surtax.
TPC also put forward three additional options that could directly strengthen the trust fund. Applying the Medicare payroll tax to employer-provided health benefits would fully close the ten-year HI funding gap while also putting downward pressure on commercial health costs and increasing wages. Closing the NIIT/SECA gap to ensure high-income households pay either the payroll tax or net investment income tax on all their income could also generate substantial revenue for the trust fund.
Outside of the Medicare trust fund, TPC also presents options to raise individual income tax rates, increase the corporate tax rate, impose a new value-added tax, or more broadly limit the payroll and income tax exclusion for employer-provided health care. These options could all generate substantial amounts of revenue to help finance the rising costs of Medicare Parts B and D. In the case of limiting the health exclusion, it can also help to fund the Social Security and Medicare HI trust funds and slow overall health care cost growth.
These revenue options, along with many other ideas to improve Medicare solvency and lower health care costs, should be part of the discussion over how to fight inflation, lower deficits, and save our major trust funds from looming insolvency.
