House Ways and Means Chairman Charlie Rangel announced that a surtax on individuals and families above a certain income level would be used to pay for health care reform. The surtax is 1% for joint filers over $350,000, 1.5% for joint filers over $500,000 and 5.4% for joint filers with over $1,000,000 in adjusted gross income ($280,000, $400,000, $800,000 for individuals respectively). The surtax would be increased if large cuts in health care do not materialize. The surtax is on adjusted gross income, so the surtax is applied before any deductions and applies equally to all forms of income such as wages, dividends, capital gains, etc.

This surtax will have a large impact on small businesses:

  • Sixty percent of all returns affected by the surtax have small business or partnership income.
  • Twenty percent of the returns affected by the surtax get over half their income from small business or partnership income. These tax payers pay one quarter of all income taxes subject to the surtax.
  • With the scheduled expiration of President Bush’s tax cuts, the federal top marginal rate on small business earnings will be 48% and exceed 50% in most states.

Chairman Rangel estimates that this plan will raise $540 billion over ten years, which is almost half of the needed revenues to pay for additional health care spending. Additional tax increases or spending reductions will need to be found to pay for new health care spending. Taxes will continue to rise to unsustainable levels if health care spending continues to rise.