House Democrats have introduced health care legislation that would impose a surtax on upper-income taxpayers, and penalties on many small businesses that don’t provide health insurance coverage to employees.

Nancy Pelosi

The bill introduced Tuesday aims to extend health coverage to 37 million more Americans over the next 10 years and allow 97 percent of legal American residents to have health insurance by 2015.

The surtax is estimated to bring in $544 billion over the next 10 years to pay for the estimated $1.042 trillion cost of the bill, known as the America’s Affordable Health Choice Act of 2009. The bill sets the surtax for individuals at 1 percent of modified adjusted gross income of between $350,000 and $500,000, 1.5 percent for incomes between $500,000 and $1 million, and 5.4 percent for incomes over $1 million. The surtax rates for taxpayers in the first two categories would double to 2 percent and 3 percent respectively if the government does not achieve its health reform savings goal by the end of 2012. However, if it exceeds the savings goal by $175 billion by the end of 2012, the surtaxes on those earning less than $1 million could be eliminated.

Senate Democrats are still working on their version of the bill, but President Obama pressed House and Senate leaders on Monday to try to produce legislation this week so the bill can be passed before the August recess. The Senate may introduce legislation by Thursday.

However, the tax provisions face stiff opposition from Republicans, as does the creation of a public option for government-sponsored health insurance. Senate Finance Committee Chairman Max Baucus, D-Mont., has advocated a tax on generous employer-provided health insurance plans as a way to pay for expanding health care coverage, but that proposal has drawn objections from the White House. The Senate Health, Education, Labor and Pensions Committee voted Wednesday to approve a portion of the overall bill that Senate Democrats plan to introduce. The party-line vote of 13-10 would require individuals to buy health coverage and their employers to help pay for it.

The House bill contains protections for workers who switch jobs or lose their jobs. “You cannot be denied care from a pre-existing condition,” said House Speaker Nancy Pelosi, D-Calif. “If you change jobs, lose your job, or start a new business, you still have health care. This is very important to the entrepreneurial spirit of America. Inaction is not an option for us. That is why we are still on schedule to do what we have planned, to vote on this legislation before we leave for the August recess.”

All but the smallest businesses would be subject to penalties for not providing health coverage to workers, and individuals could also be charged penalties if they don’t buy health insurance for themselves. However, affordability credits would be available to help people pay for health coverage.

Individuals who chose not to obtain basic health coverage would be subject to a penalty based on 2.5 percent of income, not to exceed the cost of health coverage. Hardship waivers will be granted to individuals based on criteria such as affordability or religious objections, among other reasons.

Under the bill, employers would have a responsibility to help make health insurance available for their employees. Businesses that do not offer health coverage to their workers would have to pay an 8 percent payroll tax to help subsidize coverage in a new Health Insurance Exchange that the government would set up. The exchange would allow individuals and small employers to comparison shop among public and private insurers.
Employers would contribute 72.5 percent of the cost of premiums for all full-time employees’ health coverage and 65 percent for a family policy.

Employers with annual payrolls that do not exceed $250,000 would be exempt from the requirement to provide health insurance to their workers. For employers with over $250,000 in annual payroll, the penalty for not offering health insurance would be 2 percent, rising up to the full 8 percent penalty for firms with annual payrolls above $400,000.

Workers in exempt firms would still be eligible to get coverage through a health insurance exchange.Many small businesses would also be eligible to receive a tax credit for the health insurance offered to their workers.

The bill also includes provisions that would make it easier to prosecute tax shelters, limits foreign treaty benefits for certain deductible payments, and increases the penalties for undisclosed noneconomic substance transactions.