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With Medicare facing insolvency as soon as 2028, Senate Democrats are trying to tee up a budget reconciliation measure that would raise taxes on higher-income individuals to generate $202 billion over 10 years to bolster Medicare’s trust fund.

Tax Hike Would Affect Certain Higher-Income Taxpayers

Senate Democrats are teeing up a budget proposal that would tax higher-income Americans to raise revenue to bolster Medicare’s shrinking trust fund. Negotiations are continuing on additional spending proposals that were contained in President Biden’s stalled Build Back Better initiative, with the hope of moving legislation before the August recess.

Negotiations center on Senate Majority Leader Chuck Schumer and West Virginia Democratic Senate Joe Manchin, who previously torpedoed Biden’s $2.2 trillion social spending plan. Schumer wants to resurrect a provision that would allow Medicare to negotiate lower drug prices. That provision and the tax proposal will be submitted to the Senate Parliamentarian to determine whether they are germane to a budget reconciliation measure, which is not subject to a filibuster and only requires a majority vote to pass the Senate.

Senate Majority Leader Chuck Schumer and West Virginia Democratic Senator Joe Manchin are trying to hammer out details in a budget reconciliation package that all 50 Democrats can support and allow to pass under Senate procedural rules that exempt reconciliation measures from the filibuster.

The Democratic plan would apply the existing 3.8 percent net investment tax to pass-through income earned by businesses and then distributed to owners, which is now exempt. The provision only would apply to individuals earning more than $400,000 per year and to joint tax return filers and trusts earning more than $500,000 per year. Congressional sources estimate the tax change would generate $202.8 billion in added revenue over a decade. Additional revenue would go directly to the Hospital Insurance Trust Fund, extending the fund’s solvency by three years from 2028 to 2031.

Schumer also is trying to resuscitate Biden climate change provisions, including $300 billion in tax credits for clean energy investments in solar, wind and battery storage. Tax credits also are being discussed to incentivize the purchase of electric vehicles. Manchin didn’t agree to these provisions in previous legislative iterations and may not support them in this one, either.

Some Senate Democrats are pressing to include an extension of pandemic subsidies under the Affordable Care Act, which were approved on a party-line vote in 2021, another potential flashpoint with Manchin.

Most Republicans are expected to oppose the Democratic budget proposal, warning that increased federal spending will further inflame inflationary pressures. That means the plan Schumer negotiates must gain the support of all 50 Senate Democrats, so Vice President Kamala Harris could break the tie with her ‘yes’ vote.

Attention this week also will focus on the next move by the Federal Reserve, which is considering another significant uptick in interest rates to curb inflation. Positive jobs and unemployment reports last week may embolden the Fed to approve an even larger interest rate hike, possibly 1 percent.

The June jobs report showed the addition of 372,000 jobs and a 3.6 percent unemployment rate, which is nearing a 50-year low. The number of new jobs exceeded economist predictions by 100,000 and was viewed as evidence the US economy is still healthy despite inflation. For the Fed, the positive jobs and unemployment numbers give them assurance the economy is strong enough to handle another big boost in interest rates without triggering a recession.

Positive economic news was reinforced by an apparent easing of supply chain snarls and a slow-drip decline in gas prices at the pump. But a lingering wariness remains that a downturn could be around the corner, an outlook pushed by economists who think Biden and Democrats in Congress primed the pump too much during the pandemic. Wariness also plays well on the political stump as midterm elections loom this fall that could flip control of the House and Senate to Republicans.

The June jobs report showed the addition of 372,000 jobs and a 3.6 percent unemployment rate, which is nearing a 50-year low.

House and Senate appropriations committee are at work framing actual spending bills, including direct spending requests from individual lawmakers. The federal fiscal year ends September 30.