Biden Budget Boosts Health Subsidies, Broadens Net Investment Income Tax

President Joe Biden has proposed a budget for fiscal year 2022 that could make the current, temporary increase in health insurance premium tax credit subsidies permanent.

The proposal could also increase the amount of tax revenue flowing into the main Medicare trust fund by applying the net investment income tax or the self-employment tax to more of high-income taxpayers’ income, and by sending the revenue from the net investment income tax into the main Medicare trust fund. Today, revenue from the net investment income tax goes to the U.S. Treasury.

The Biden administration has described the Affordable Care Act premium tax credit increase proposal on page 1,061 of the main budget appendix file. The administration has described the proposed changes in the scope of the net investment income tax and self-employment tax in a section that starts on page 71 of the U.S. Treasury Department’s “greenbook,” or description of the Biden administration’s proposals for raising revenue.

Fiscal year 2022 starts on October 1. The budget proposal, a document describing the Biden administration’s spending and revenue-raising ideas, is subject to review by Congress.

The Health Insurance Premium Tax Credit Increase Proposal

Starting in 2014, the Affordable Care Act (ACA) began to provide tax credits for people who bought commercial major medical insurance through the ACA public exchange system—the family of web-based health insurance supermarkets that includes HealthCare.gov, Covered California, and Pennsylvania’s new Pennie exchange.

Exchange plan users with income from about 138 percent of the federal poverty level to 400 percent of the federal poverty level could use the ACA tax credits to pay part or all of their insurance premiums.

In March, when Congress passed the American Rescue Plan Act of 2021 (ARP), it tried to help uninsured people cope with the Covid-19 pandemic by providing richer premium tax credit subsidies.

One section of the law provided temporary subsidy help for all unemployed people. Another section, Section 9661, provided more generous subsidy levels for 2021 and 2022.

The Biden administration says in the 2022 budget appendix that it wants to “make permanent the premium tax credit expansion implemented in Section 9661 of the American Rescue Plan.”

An ACA premium tax credit subsidy is supposed to hold what a consumer pays in cash for health coverage to a certain percentage of the consumer’s modified adjusted gross income, or MAGI. When the federal government describes ACA premium tax credit subsidies, it shows the maximum amount of MAGI that people will have to spend out of pocket to get covered. Once subsidy users pay their share of the premium bills, the government then pays the rest of the premiums.

Here’s how Section 9661 changed the share of MAGI that people must spend to get covered, when compared with the MAGI spending levels that were in effect before ARP took effect.

• 100%–133% of federal poverty level: 0% of MAGI spent on coverage (down from 2.07%)
• 133%–150%: 0% (down from 3.1% to 4.14%)
• 150%–200%: 0 to 2% (down from 4.14% to 6.52%)
• 200%–250%: 2% to 4% (down from 6.52% to 8.33%)
• 250%–300%: 4% to 6% (down from 8.33% to 9.83%)
• 300%–400%: 6% to 8.5% (down from 9.83%)
• Over 400%: 8.5% (down from having no limit)

The Biden budget proposal does not appear to include the ARP temporary premium tax subsidy aimed at people who are unemployed.

The Net Investment Income Tax and Self-Employment Tax Expansion Proposal

One big, high-profile revenue-raising provision in the Biden budget proposal would impose a retroactive increase in the capital gains tax. The Biden administration is predicting that the changes in the capital gains tax rules could raise $7.7 billion in 2022 and about $25 billion in 2023. That revenue would go to the U.S. Treasury.

Biden’s budget also calls for capital gains taxes on almost any increase in value of assets that a taxpayer leaves to heirs.

Other changes, which could directly increase the amount of revenue supporting Medicare, would have a big effect on high-income people with substantial amounts of investment income, and on people who make money by working actively as limited partners in partnerships or as owner-employees of S corporations.

Today, taxpayers who are general partners or sole proprietors pay self-employment taxes on their business income. High-income taxpayers who are subject to self-employment taxes pay 3.8 percent of their wages and other earnings into Medicare. The federal government imposes a 3.8 percent net investment income tax on the investment earnings of single taxpayers who earn at least $200,000 and couples who earn at least $250,000 and file joint returns. The revenue from that tax goes to the U.S. Treasury. Owners of S corporations and limited partners who are active owner-employees at partnerships may not pay either self-employment tax or the net investment income tax, Treasury officials report.

The Biden budget proposal calls for all high-income taxpayers to pay a 3.8 percent Medicare tax, whether through the self-employment tax or through the net investment income tax, and to have the net investment income tax revenue flow into the main Medicare trust fund. That means some limited partners and limited liability company members who now pay no Medicare taxes would end up paying a 3.8 percent Medicare tax, officials write.

Self-employment tax exemptions for certain types of partnership income, such as rent and capital gains, would continue to apply, but the definition of “net investment” would expand to “include any gross income or gain from any trades or businesses that is not otherwise subject to employment taxes.”

Administration officials predict the changes would raise $11 billion in new revenue in 2022 and more than $19 billion in new revenue in 2023.

From: ThinkAdvisor