Tax Refund

President Biden may propose allocating revenue from the 2010 Affordable Care Act’s Net Investment Income Tax (NIIT) to maintain solvency of Medicare’s Part A Hospital Insurance (HI) Trust Fund.

Two highly placed sources say the proposal may be included in the budget Biden is due to release on March 9. Shifting those funds from general revenues would generate $500 billion for Medicare over the next decade, according to the Congressional Budget Office. Without any changes, the Trust Fund could become insolvent in as soon as five years.

In his February State of the Union address, Biden promised to extend  for “at least two decades” solvency for Medicare Part A, which is funded through the HI Trust Fund. And shuffling NIIT revenues could achieve much of that goal without raising taxes, increasing beneficiary cost-sharing, or cutting payments to hospitals or other Part A providers. It also would be a case of doing what many people thought the law did 13 years ago, but didn’t.

Expanding the Medicare tax base

However, it would do nothing to reduce the budget deficit and debt. Instead, it would transfer money from other federal programs, such as food security, national defense, and environmental protection.

Perhaps most important, it would fundamentally shift Medicare Part A from a program funded almost entirely with payroll taxes on wages to one financed with taxes on a much broader income base, at least for high-income households.

In his fiscal year 2022 budget, Biden proposed both expanding the NIIT and shifting its revenues to the HI Trust Fund. But he didn’t pursue the plan, it never got traction in Congress, and was dropped from his fiscal 2023 Budget.

This year, however, government spending, including for Medicare, has attracted significant attention from the new House Republican majority and some GOP senators. Shifting NIIT revenues could give Biden the ability to claim he is making the HI trust fund whole while avoiding politically unpopular decisions.   

Who pays?   

The 3.8 percent NIIT is imposed on unmarried taxpayers with modified adjusted gross income (MAGI) in excess of $200,000 and joint filers with income of $250,000 or more. Those thresholds are not indexed to inflation. The tax applies to interest, dividends, annuities, royalties, certain rents and other passive business income, and some profits from home sales.

It excludes wages, unemployment compensation, active business income, Social Security benefits, alimony, tax-exempt interest, and distributions from employment-based retirement accounts such as  401(k)s.

The NIIT often is confused with another ACA tax on high-income households: the 0.9 percent additional Medicare tax on earnings in excess of $200,000 for individuals ($250,000 for married couples). Unlike the NIIT, it is an additional payroll tax that does go directly to the HI Trust Fund.

About 90 percent of the HI trust fund is financed with payroll taxes. Most of the rest comes from the income tax on Social Security benefits for those with incomes of more than $25,000 for single filers and $32,000 for joint filers. But that income tax contribution is very small, only about 7 percent of HI revenue. Biden’s NIIT proposal would add substantially more general revenue to the HI pot. 

General tax revenues already fund about three-fourths of the other parts of Medicare, including Part B and the Part D drug benefit. Most of the remaining funding for those benefits comes from participant premiums.

Didn’t Congress already do this?

One oddity of Biden’s proposal is that many outside observers and even some lawmakers thought the ACA already shifted NIIT revenue to Medicare. Some language in the original law suggested it did, but the measure never included a way to implement the change. Depending on who you ask, that may have been an unintentional drafting error, a political decision, or the victim of complex congressional budget rules. Nonetheless, for the past decade, NIIT revenues went into the federal government’s general fund, not the HI Trust Fund. 

Most congressional Democrats are likely to embrace Biden’s idea. But it still faces a tough slog in the Republican-controlled House.   



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