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Democrats eye capital gains tax

Some see it as way to help pay for health reform, avoid angry unions

WASHINGTON – Democratic congressional leaders, intensifying the health care drive in marathon White House talks Wednesday, are considering a new strategy to help finance their plan – applying the Medicare tax not just to wages but to capital gains, dividends and other forms of unearned income.

The idea’s political advantages are threefold: It could placate labor leaders who bitterly oppose President Barack Obama’s plan to tax high-end insurance policies that cover many union members. It could help shore up Medicare’s own shaky finances. And the new tax would fall primarily on affluent Americans, not the beleaguered middle class.

But the concept also carries political risks: Many older Americans, one of the nation’s most potent voting blocs, could see their tax bills rise because they often depend on savings and investment income in retirement.

The new tax on investment income is part of the narrowing range of ideas being considered as Obama and his allies push to wrap up work on far-reaching legislation to expand health care coverage, rein in insurance industry abuses and curb health care costs.

Among the most politically sensitive questions to be resolved is how the bill’s new spending will be offset, to keep it in line with Obama’s promise that revamping health care would not add to the federal deficit.

Obama and Senate Democrats have wanted a big part of the financing to be a tax on expensive health insurance plans, but that is opposed by labor leaders who say many workers gave up wage hikes in favor of richer benefits.

Democrats had begun considering ways to scale back the tax on so called “Cadillac” plans – either by raising the value of the plans that would be affected or carving out an exception for union-negotiated plans.

But any such changes would reduce revenue. Expanding the Medicare could take up the slack.

Under current law, the Medicare trust fund is financed with a 2.9 percent tax on wages – half paid by employees, half by employers. There is no limit on the amount of wages that are taxed, but the levy does not apply to capital gains, dividends and other unearned income.