Democrats Plan to Close Tax Loophole to Extend Medicare Solvency

What You Need to Know

Individuals earning over $400,000 a year could pay a 3.8% health surcharge on pass-through business income.

Senate Democrats have reached a deal to extend the solvency of Medicare by closing a tax loophole frequently used by law firms and other partnerships, adding another leg to President Joe Biden’s revised economic agenda.

The agreement by all 50 members of the Senate Democratic caucus to require so-called pass-through businesses to pay a 3.8% health surcharge on some income follows a separate deal announced on prescription drug pricing, announced Wednesday.

The two deals will form part of a budget bill embodying pieces of Biden’s long-stalled agenda that Democrats hope to pass without Republican support by the time of the August recess.

Under current law, the Medicare hospital trust fund is to become insolvent by 2028. The deal would provide funding to extend that to 2031, a person familiar with the talks said.

The $200 billion in additional funding is paid for by counting distributed profits in pass-through entities as subject to the 3.8% tax instituted by the Obamacare law — but only for individual earners making above $400,000 per year.

The Medicare provision is the result of secretive talks between Senate Majority Leader Chuck Schumer and West Virginia Senator Joe Manchin.

In December, Manchin withdrew support for Biden’s previous long-term agenda — a $2 trillion tax, climate and social spending package.

The new talks revolve around raising $1 trillion in revenue to pay for $500 billion in new spending, with $500 billion for federal budget deficit reduction over ten years.