A Surtax on Upper Incomes? Don't Count It Out

A surtax on upper income taxpayers might look like an idea that's going nowhere, given the firestorm that erupted when a House committee moved to add it the health care reform bill pending in the House.

But don't dismiss the surtax just yet: It's still a live option for lawmakers struggling to figure out how to pay for overhauling the health care system. And even if Congress gives it a thumbs-down this year, be prepared: The surtax idea will be back. Top congressional Democrats have long eyed it as a hefty revenue raiser, and they see it as a way to foot the bill for middle income tax relief.

True, opposition to the pending surtax proposal has been pretty vociferous. That's partly because the proposal -- an extra 1%, 1.5% or 5.4% of income tax on top of what you're already paying, depending on your income -- would start at what opponents say are relatively low levels: Modified adjusted gross incomes of more than $280,000 a year for single taxpayers and modified AGI over $350,000 for couples. (Modified AGI is AGI less amounts that itemizers deduct for investment interest.) Critics argue that owners of unincorporated businesses -- who report their business income on their personal tax returns -- would be hit hard by the surcharge, because $280,000 of modified AGI isn't a king's ransom for a business owner.

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So House Speaker Nancy Pelosi has said she's looking at changing the proposal before it comes to a vote in the House so that the surtax would start at higher levels -- $500,000 of modified AGI for singles and $1 million for married couples. Even at those levels, the surtax faces tough going in the Senate, which has shown no inclination to use that type of levy to pay for health care reform.

But consider this: None of the other big revenue raisers being considered as offsets for the cost of health care overhaul are any less controversial than a surtax. Look at some of the other ideas on the table: Limiting the income exclusion that employees enjoy for their employer-provided medical coverage. Taxing gold-plated health insurance plans. And placing new limits on the itemized deduction for medical expenses. None are gaining any traction. So don't rule out the surtax just yet.

If a surtax does go down in flames this year, why worry that it might resurface? Because the need to raise revenues is only going to intensify down the road, when the Bush tax cuts expire. President Obama and congressional Democrats have made it clear that they want to retain those tax cuts for single taxpayers with taxable incomes of around $190,000 and couples with about $230,000. But to accomplish that goal, someone's ox is going to have to be gored. It's very likely that the ox, in this case, will be the upper-income taxpayer.