WASHINGTON — Senate Democrats will push to raise taxes on some high-income Americans and direct the money to improve Medicare’s solvency, according to officials familiar with the plan, as they craft a modest version of President Biden’s stalled tax-and-spending package.
The proposal is projected to raise $203 billion over a decade by imposing an additional 3.8 percent tax on income earned from owning part of what is known as a pass-through business, such as a law firm or medical practice. The money to be generated by the change is estimated to be enough to extend the solvency of the Medicare trust fund that pays for hospital care – which is currently set to start running out of money in 2028 – until 2031.
It is the latest agreement to emerge from private negotiations between Sen. Chuck Schumer of New York, the majority leader, and Sen. Joe Manchin III of West Virginia, a conservative Democrat who has urged his party to rein in its sweeping ambitions for a domestic policy plan. In December, Mr. Manchin torpedoed efforts to pass Mr. Biden’s $2.2 trillion social security, climate and tax package over concerns about its cost and impact on the economy at a time of rising inflation.
His support is crucial because, with Republicans expected to be equally opposed, the only way Democrats can push the package through the evenly divided Senate is to win unanimous support from their caucus and do so under special budget rules that would protected against filibuster and allow simple majority voting.
Mr. Schumer is working to salvage key components of the plan that could pass that test, including a plan released Wednesday to lower the cost of prescription drugs. Mr. Manchin has repeatedly said such legislation should focus on tax reform and drug pricing, as well as efforts to reduce the national debt. The bill is also expected to include some climate and energy provisions, a key priority for Democrats, although they have yet to be agreed upon.
Democratic leaders, who hope to push the legislation through the Senate this month, are expected to formally release the Medicare plan in the coming days, according to officials who disclosed preliminary details on condition of anonymity.
The fast-track budget process the party plans to use for the overall package, known as reconciliation, requires the legislation to follow strict budget rules imposed by the Senate parliamentarian. The prescription drug bill has been introduced to the House, and Democrats plan to introduce the tax increase and the Medicare portion in the coming days.
The portion of Medicare that pays hospital bills is funded through a special trust fund, largely funded by payroll taxes. But with escalating health care costs and an aging population, current revenues won’t be enough to pay all Medicare hospital bills forever. According to the latest report from the Medicare trustees, the fund will be depleted in 2028 without new revenue or spending cuts.
The Democrats’ plan would extend the existing 3.8 percent net investment income tax to so-called pass-through income earned by businesses that distribute profits to their owners. Many people who work at such firms – such as law partners and hedge fund managers – earn high incomes but avoid the 3.8 percent tax on most of them.
The new proposal would only apply to people earning more than $400,000 a year and joint filers, trusts and estates bringing in more than $500,000, in line with Mr Biden’s pledge not to raise taxes on people , who make less than $400,000 a year. The proposal is similar to a tax increase proposed by Mr. Biden in 2021 to help offset the costs of a range of new spending programs designed to help workers and families, such as home health care and child care.
Imposing the new tax on pass-through income would raise about $202.6 billion over a decade, according to a Joint Committee on Taxation estimate provided to Senate Democrats and reviewed by The New York Times. These funds will go directly to the Hospital Insurance Trust Fund, which covers hospital care, some home health care and hospice care.
The Office of the Actuary at the Centers for Medicare and Medicaid Services informed Democratic staff that the additional revenue generated would extend the solvency of the hospital trust fund from 2028 to 2031.
“Medicare is a lifeline for millions of American seniors, and Senator Manchin has always supported ways to ensure it remains solvent,” said Sam Runyon, Mr. Manchin’s spokesman. “He remains optimistic that there is a way to do just that.”
She warned that a comprehensive deal on a wider package of measures on climate, tax and spending had not yet been reached. Some Democrats also hope to include an expansion of the Affordable Care Act’s expanded subsidies, which were passed on a party-line vote in the $1.9 trillion 2021 pandemic relief package.
“Senator Manchin still has serious outstanding concerns and a lot of work to do before it is possible to get a deal that he can sign,” Ms. Runyon said.
Although Mr. Manchin has said he would support additional tax increases, any changes to the tax code must also win the support of Senator Kirsten Sinema of Arizona, a centrist who opposed many of his party’s original tax proposals.
And while many Democrats are concerned about tackling climate change ahead of midterm elections that could shift the balance of power in Washington, Mr. Manchin, who has championed his state’s coal industry, continues to haggle on the issue.
The heart of the climate plan is expected to be roughly $300 billion in tax credits to expand the development of clean energy such as wind, solar and battery storage, a significantly smaller plan that reflects concessions to Mr. Manchin, according to several people. familiar with Negotiations.
Negotiators are also considering tax credits to incentivize the purchase of electric vehicles, although it is unclear whether Mr. Manchin would support such a provision.
Lisa Friedman contributed reporting.
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