The House is likely to pass a bill on Wednesday despite Democratic objections.
House Ways and Means ranking member Sander Levin (D-Mich.) argued that the Republican bill could require some families to pay back the tax break for federal healthcare if their salary changes during the year and pushes them over the threshold, forcing them to pay back upward of thousands in tax breaks.
"It reinstates a steep cliff we eliminated in December legislation that smoothed out payments," Levin told the panel.
He said the measure also could leave 266,000 people uninsured because those straddling the top of the income level may forgo healthcare, according to an analysis by the Joint Committee on Taxation.
The Republican-proposed offset would recapture improper overpayments of exchange subsidies established under the new healthcare law for those consumers earning more than to 400 percent of the poverty line. Those making less than that would have to pay back a greater portion than they are required to pay back under current law when health insurance exchanges open in 2014.
The most recent "doc fix" patch to stave off cuts in Medicare physician reimbursements also boosted the penalties for recapturing exchange subsidies.
House Ways and Means Committee Chairman Dave Camp (R-Mich) countered Levin's argument saying the legislation is merely collecting payments that shouldn't have been made because those who receiving the tax breaks aren't eligible in the first place so it can't be considered a tax increase.
"It's not a tax increase, no ones rates go up," Camp said. "It's inaccurate reading of the tax tables."
Republicans said their bill returns the recapture penalties closer to the healthcare reform law's original language, but Democrats said it would remove a provision that protects people from having to pay the IRS the entire tax credit.
Camp argued that repealing the 1099 provision would reduce deficit by $166 million in the first 10 years and has the support of 170 small business organizations.
The Rules panel voted against, 4-7, on approving Crowley's amendment.
"If it walks like a tax increase, talks like a tax increase, it is a tax increase," Crowley told the committee.
"Democrats are ready to repeal the provision, but we won't do so on the backs of middle-class Americans."
The Senate recently approved its own repeal in the Federal Aviation Administration reauthorization.
Sen. Mike JohannsMike JohannsTo buy a Swiss company, ChemChina must pass through Washington Republican senator vows to block nominees over ObamaCare co-ops Revisiting insurance regulatory reform in a post-crisis world MORE (R-Neb.), one of the leaders in the upper chamber on the issue, recently introduced a measure that mirrors the House's proposed legislation.