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September 20, 2014

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Payroll tax cut proposals die, but debate over what the rich should pay rages on

Democrats and Republicans -- which in Nevada means Rep. Shelley Berkley and Sen. Dean Heller -- spent the last 24 hours arguing about which party’s proposal to pay for a payroll tax cut is a worse deal for the American people.

Now that both bills are dead, there's going to be more arguing over whose plan to get the very rich to foot the bill for the working middle class can succeed in a compromise -- and in practice.

Millionaires and billionaires have become the focus of a debate that is pitting the idea of raising taxes against the idea of raising Medicare rates to cover the cost of a payroll tax increase.

Democrats, led by Sen. Harry Reid, say they can offset the total cost of a 50 percent payroll tax reduction for workers and employers’ first $5 million of payroll (total cost = $248 billion) with a 3.25 percent millionaires’ tax on everything they make over a million dollars. Republicans hate the idea: they say it hurts small business and job creators.

Republicans say their proposal -- presented by Heller -- can cover the somewhat smaller cost of a two-year extension of the current payroll tax cut (regularly it’s 6.2 percent; it’s been 4.2 percent since last December) by shrinking the federal workforce and raising Medicare premiums for millionaires and billionaires, and still have enough money left over to slash $111 billion from the national debt.

But it can’t, not completely. To fully cover the cost of a payroll tax and this deficit reduction, the Republican plan also dips into the pockets of upper middle class, non-millionaire Medicare beneficiaries and it does so by extending a provision of the law their party reviles most: Obama’s health care overhaul.

The catch comes under Medicare Part B (non-hospital medical care) and Part D (prescription drug) premiums, which are paid or deducted from Social Security checks according to each beneficiary’s annual income : individuals earning at least $85,000 in gross annual income have to pay an extra premium; it increases as wages increase.

Those income levels are normally tied to inflation, just like Social Security cost-of-living adjustments and the cost of Medicare premiums. But under the Affordable Care Act, the income levels were frozen for 10 years, through 2019.

Heller’s plan continues that freeze through 2022.

It’s the kind of political irony you only find in Washington. When that inflation adjustment freeze was created, Berkley voted for it as part of the larger Affordable Care Act; Heller didn’t. Now Heller’s trying to extend the provision, and Berkley’s railing against Heller for sending Medicare costs down a “slippery slope.”

The addition of three years to the inflation freeze is a minor clerical change on paper with real implications for future Medicare beneficiaries, because today’s $85,000 isn’t next decade’s $85,000; and that becomes more true as the economy moves along the path to recovery.

Over time, the dollar depreciates, and so the dollar-amount of incomes rise. Even as the biggest recession since World War II shook the economy and poverty rates rose over the last decade, average per capita incomes increased: from $29,469 in 2000 to $40,584 in 2010 nationally, and in Nevada, from $29,506 in 2000 to $36,997 in 2010.

In a healthy economy, inflation ticks up by a few percentage points a year.

That inflation has modest effects on Medicare beneficiaries' monthly premiums: for example, in 2012, the monthly base premium is rising by about $3.50 (from $96.40 to $99.90 -- that being the basic monthly premium a Medicare Part B beneficiary who makes less than $85,000 per year pays).

When that rate hike was announced a month ago, Health and Human Services Secretary Kathleen Sebelius dismissed it as being more than compensated for by the uptick in Social Security that’s coming in 2012 of 3.6 percent -- or about $40 more per month for the average recipient.

But if that extra inflation-indexed income kicks you up over $85,000 -- as it conceivably would for a set of upper middle class retirees every year -- the kick-up in your Medicare premiums could cost you much of that extra cash. Medicare Part B premiums cost an extra $40 a month and Medicare Part D premiums an extra $11.60 a month once you clock in at $85,000 a year.

Granted, seniors making $85,000 a year are not considered poor or destitute, nor are they likely to be considered such in the next decade, even if the economy experiences a miraculous recovery. And the real effect of three more years of a freeze that's already with us for another eight isn't easy to gauge as an individual.

But when you’re talking about projected pay-fors, there's clearly money there to be saved, or it wouldn't be in the bill. Heller’s staff couldn’t immediately detail exactly how much of the cost of the payroll tax was being soaked up by the extension of the Affordable Care Act inflation adjustment freeze through 2022; the Congressional Budget Office score they were dealing with doesn’t break things down that far.

But they defended Heller’s explanation of the changes to Medicare as affecting millionaires and billionaires as accurate.

“The millionaire portion, you’re always going to have to be a millionaire to reach that threshold no matter what,” said Heller spokesman Stewart Bybee.

In that section, Heller’s bill creates two separate high-income categories: one for those who earn more than $750,000 and another for those making over $1 million.

And that's where this comes down to a difference of philosophy: Is it better to make millionaires pay an extra 3.25 percent tax on their million-plus income, or institute a rate hike to millionaires' Medicare?

Maybe neither, as far as the Senate is concerned. Neither Heller's nor the Democrats' proposals could pull enough votes to get past a potential filibuster in the Senate tonight, though the Dems' plan (headlined by Sen. Bob Casey of Pennsylvania) did get a 51 to 49 majority. The Republican proposal went down 20 to 78.

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  1. You gotta hand It to those Republicans they talk a good game but they were never serious about reducing the debt or creating jobs. They just used those issues to get elected so they can protect and promote there masters on wall street.