TSCL recently confirmed that a Medicare tax that became effective in 2013 never made it into the Medicare Hospital Insurance Trust Fund. Tens of billions in revenues wound up going into the U.S. General Budget Fund instead of Medicare. A recent survey by TSCL found that 76% of adults aged 65 and up think that needs to be fixed - the Medicare tax needs to be re-routed to the Medicare Hospital Insurance Trust Fund where it was originally intended to go.
In 2013, Medicare taxation changed in two ways. A 0.9% surtax was added to the amount of Medicare payroll taxes paid by high-earning individuals on wages over $200,000 (individuals) or $250,000 (married filing jointly). This was in addition to the 1.45% tax that workers paid on their wages. At the same time when the surcharge on earnings was enacted, a new 3.8% tax was applied to net investment income over the above amounts. For the first time, interest, dividends, capital gains, rental, royalty income, and non-qualified annuities would be taxed for Medicare purposes. The provisions were part of the Healthcare Education and Reconciliation Act of 2010 which provided funding for provisions of the 2010 Affordable Care Act.
The legislation specifies that net investment income for those with wages over $200,000/$250,000 would be subject to the 3.8% tax and that net investment income would be taxable for Medicare purposes. A summary of the legislative provisions on www.Congress.gov reads: “(Sec. 1402) Includes net investment income in the Medicare taxable base and imposes a 3.8% tax on such income, beginning in 2013.” The legislation specified that taxpayers with adjusted gross incomes of less than $200,000 ($250,000 for joint returns) were excluded from this tax. “Net investment income” is defined to include interest, dividends, annuities, royalties, rents, passive income, and net gain from the disposition of non-business property.
Despite those specifics, the 3.8% “Medicare” net investment tax never went to Medicare but wound up going straight into the U.S. General Fund instead. According to the Federal Register, “Amounts collected under [26 U.S.C.] section 1411 are not designated for the Medicare Trust Fund. The Joint Committee on Taxation in 2011 stated that’s because ‘No provision is made for the transfer of the tax imposed by this provision from the General Fund of the United States Treasury to any Trust Fund.’”
Today, the revenues from that tax can be spent on any government budget item, and because the revenues weren’t earmarked for the Medicare Hospital Insurance Trust Fund, those revenues aren’t earning any interest from the non-marketable bonds that the Trust Fund would typically receive for surplus tax revenues.
Medicare Part A is facing insolvency around 2032 according to trust fund projections of the Congressional Office’s latest Budget & Economic Outlook for February 2023. In his FY2024 budget, President Biden proposed that the revenues raised by the 3.8% net investment income tax should be “re-directed” to the Part A Trust Fund rather than the federal government’s general revenue.
A big majority of older voters think it’s about time. A 2022 survey of more than 2,550 older Americans by TSCL indicates that 76% support doing so. TSCL believes that Medicare healthcare costs already cause many beneficiaries to shoulder a heavy financial burden in retirement. Cutting Medicare benefits, while shifting more costs to beneficiaries, would be the wrong way to strengthen program financing. The revenues from this tax could help strengthen solvency without cutting access to hospital services.