Biden Budget Will Propose Tax Increase to Bolster Medicare

WASHINGTON — President Biden, as part of his budget set for release on Thursday, will propose raising and expanding a tax on Americans earning more than $400,000 as part of a series of efforts to extend the solvency of Medicare by a quarter-century.

In spotlighting his Medicare plans, Mr. Biden is seeking to sharpen a contrast with Republicans and cast himself as a protector of cherished retirement programs — both for his likely re-election campaign and for a looming congressional battle with House conservatives who are demanding steep cuts in federal spending in order to raise the nation’s borrowing limit.

The early release of the Medicare proposals, detailed in a White House fact sheet on Tuesday, also underscored the degree to which Mr. Biden has fully embraced the political upside of taxing high earners. That is the case even though administration officials have conceded there is little chance those tax increases will pass Congress.

The proposals would affect the so-called net investment income tax, which was enacted to help offset the cost of former President Barack Obama’s signature health care law. They would increase the tax rate to 5 percent from 3.8 percent for people earning above $400,000 a year and expand the income subject to it.

Independent estimates from the Urban-Brookings Tax Policy Center and the Committee for a Responsible Federal Budget suggest the changes could raise at least $350 billion, and possibly as much as $600 billion over the course of a decade. White House estimates are even higher: $700 billion in net new revenue over a decade, all from high earners.

Mr. Biden is also proposing new cost savings for the government stemming from more aggressive negotiation over prescription drug prices. Those plans are almost certain to be rejected by Republicans, who won control of the House in November and roundly oppose both tax increases and Mr. Biden’s efforts to reduce pharmaceutical prices through regulation.

The president’s emphasis on so-called entitlement programs is part of a sustained effort to claim a high ground with voters on both Medicare and Social Security and put Republicans in a difficult position as he clashes with conservatives on spending, taxes and debt.

Medicare’s trustees estimate its hospital trust fund will be insolvent by 2028 without congressional action.

Many Republicans have long supported cuts to the programs or raising their retirement ages to shore up the program’s finances and reduce federal spending. But others, aware of the potential voter backlash from touching popular programs, have grown wary of embracing the types of changes to the programs that were part of the Republican mainstream a decade ago. Former President Donald J. Trump vowed to protect both Social Security and Medicare and has urged Republicans to follow suit.

Speaker Kevin McCarthy recently said he would not seek cuts to the programs in discussions with Mr. Biden over raising the debt limit, though more conservative members of his party are still pushing for reductions.

“This debate over entitlements tied to the need to raise the federal debt ceiling has tied the party in knots,” said Larry Levitt, an executive vice president at the Kaiser Family Foundation, a health research group. “And I think President Biden is happy to engage in this debate and put forward proposals to sustain Medicare without cutting benefits or eligibility.”

Mr. Biden has refused to negotiate with Republicans over the debt limit, though he has said he is willing to discuss fiscal policy more broadly. He repeatedly attacked Republicans on Social Security and Medicare, vowing not to cut the programs and piling on when Republican lawmakers declared them off the table in budget talks.

The president’s budget plan seeks to further that message, in part by employing accounting maneuvers to make Medicare appear more solvent by directly dedicating more federal revenues to its trust fund. The budget will dictate that both the new tax increases and the savings from spending on prescription drugs would be used to increase the trust fund that finances Medicare’s hospital benefits. It will also propose transferring the existing revenue stream from the net investment tax to feed Medicare’s trust fund.

The White House anticipates that together the changes would total about $1.5 trillion over the next decade, ensuring the fund can pay Medicare’s hospital bills for an additional 25 years. The finances for the part of Medicare that pays for doctor’s visits, which is also projected to grow substantially in coming years, would be unaffected.

“The budget I am releasing this week will make the Medicare trust fund solvent beyond 2050 without cutting a penny in benefits,” Mr. Biden wrote in an opinion piece for The New York Times on Tuesday. “In fact, we can get better value, making sure Americans receive better care for the money they pay into Medicare.”

For the first time this year, Medicare will begin regulating the price of prescription drugs, using new powers Congress gave it in the Inflation Reduction Act, the tax, health and climate bill Mr. Biden signed late last summer. The president’s budget highlights the substantial savings that the reforms are expected to generate over time.

The legislation allows Medicare to regulate the price of certain expensive drugs that have been on the market for several years. It also limits the amount all drugmakers can raise prices each year. Those reforms would save Medicare about $160 billion over a decade, according to the Congressional Budget Office.

The changes to prescription drug prices accompanied changes to Medicare’s benefit that will also lower the costs of expensive drugs for its beneficiaries, by capping the total amount they can be asked to pay in a year for all their medicines and by limiting co-payments on insulin to $35 a month.

Mr. Biden will propose expanding the drug negotiations by allowing the government to negotiate over a broader universe of medications. The White House estimates that those changes and other tweaks to the drug negotiation provision would save the government an additional $200 billion over 10 years, which it seeks to direct to the Medicare trust fund.

The United States pays more than double the drug prices of other developed countries. But lowering those prices is projected to cause less investment in new drug technology. The Congressional Budget Office estimated that the drug price reforms that passed last year will mean about 13 fewer drugs in the next 30 years, about a 1 percent reduction. The budget proposal would likely have a larger effect.

Democrats cheered the proposals. Senator Ron Wyden of Oregon, who chairs the finance committee, called them “proof positive that Medicare’s guarantee of quality health care for older Americans can be secured for the next generation without raising the eligibility age, cutting benefits or handing over the program to big insurance companies.”

Mr. Biden did not propose other major new policies to reduce Medicare’s spending on health care in the coming years, according to the fact sheet. His proposal, like his previous budgets, omits a series of policies meant to reduce waste that were featured in budgets offered by Mr. Trump and Mr. Obama. The largest categories of Medicare spending — payments to doctors and hospitals — would be unchanged.

Republicans are unlikely to go along. They have tried to overturn the entire Inflation Reduction Act, including the drug negotiations, which some members of the party say will hamper innovation in the pharmaceutical industry. They have also sought to roll back Mr. Biden’s tax increases on corporations and high earners.

Mr. Biden’s plans drew mixed reactions from budget-focused groups in Washington on Tuesday. The Committee for a Responsible Federal Budget said it would “strongly support” the proposals but had reservations over shifting revenues from the government’s general fund to the Medicare trust fund. The National Taxpayers Union, which supports lower taxes and less federal spending, called those shifts “a gimmick, not a real reform.”