Biden Proposes Tax Hike on Income Over $400K to Fund Medicare

What You Need to Know

The president’s budget also proposes the ending of a tax loophole used by business owners and higher earners.
Medicare’s Hospital Insurance Trust Fund, also known as Part A, is currently projected to reach insolvency as soon as 2028.
Biden’s plan has little chance of becoming law, especially after Republicans took control of the House of Representatives this year.

President Joe Biden’s budget will propose hiking payroll taxes on Americans making over $400,000 per year and allowing the government new power to negotiate drug prices as part of an effort the White House says will extend the solvency of a key Medicare program for another quarter century.

“The budget I am releasing this week will make the Medicare trust fund solvent beyond 2050 without cutting a penny in benefits,” Biden said Tuesday in an op-ed published in the New York Times shortly before the announcement. “In fact, we can get better value, making sure Americans receive better care for the money they pay into Medicare.”

The president’s budget, which will be released Thursday, proposes raising Medicare taxes from 3.8% to 5% on annual income above $400,000, and eliminating a loophole business owners and higher earners can exploit to avoid additional taxes, according to a White House fact sheet.

Biden’s plan would also help bolster Medicare reserves through some $200 billion in prescription drug reforms over the next decade by allowing the insurance program to negotiate costs on more medications and sooner after they come to market.

The Medicare portion of the budget plan was announced by the White House on Tuesday and reported earlier by the Washington Post.

The moves are part of a concerted effort by the White House ahead of looming negotiations over the debt ceiling and government funding, where Republicans vow to seek deep cuts to federal spending.

Biden’s plan has little chance of becoming law, especially after Republicans took control of the House of Representatives this year, but the proposal is an important signpost for negotiations over government spending, and offers the president a chance to publicly outline his priorities.

GOP Pushback

House Speaker Kevin McCarthy has vowed the GOP won’t touch Medicare or Social Security, programs that share bipartisan support, particularly among elderly voters.

But Democrats, including Biden, have repeatedly highlighted past GOP efforts to overhaul the entitlement programs by reducing eligibility or benefits. Ahead of the budget release, White House officials have challenged McCarthy to specify where he would pursue cuts.

Ending Loophole

In addition to the higher Medicare tax rate on income above $400,000, Biden’s plan would eliminate a loophole that allows certain business owners who receive income through an S corporation, limited liability company, or limited partnership to avoid paying Medicare taxes on some of their income.

The plan would also dedicate the proceeds from a tax created as part of Obamacare — known as the net investment income tax — to the Hospital Insurance Trust Fund. While doing so would not impact the overall federal deficit, since it amounts to diverting an existing revenue stream, the proposal does allow the administration to say it is extending the program’s solvency.

Proposed changes to Medicare’s ability to negotiate prescription drugs would also benefit seniors on Medicare by lowering their out-of-pocket costs, the White House says.

Biden’s budget will specifically propose capping the cost of certain generic drugs, like those used to treat hypertension and high cholesterol, to $2 per prescription per month. The budget also eliminates the fee patients have to pay on up to three mental or behavioral health visits per year.