The National Taxpayers Union predicts millions of unintended taxpayers will be hit by the medicare payroll tax that is in the House-passed health reform package because the levy is not indexed for inflation.
"[T]he new Medicare payroll tax hike will likely grow to hammer four to five million taxpayers after its first decade of operation because the income thresholds at which the tax applies are not indexed for inflation," stated the NTU in prepared remarks.
The 3.8 percent tax is aimed at unearned income of wealthier taxpayers, but because it is not indexed for inflation, as incomes rise over time more taxpayers will be susceptible to the tax.
Assuming a 3.9 percent growth rate, the NTU argues households currently earning $175,000 annually will make $257,000 in 10 years and be subjected to the tax.
The tax's thresholds are $200,000 for individuals, and $250,000 for couples. The NTU points out that if they were adjusted to the Consumer Price Index for Urban Consumers limits would increase to $246,000 and $308,000, respectfully. Using the Social Security Administration's Average Wage Index, thresholds would be $293,000 and $367,000, respectfully.
In 1969, lawmakers created a similar situation when it passed the Alternative Minimum Tax and did not properly index it for inflation.
The levy was aimed at wealthy individuals but middle-class taxpayers were eventually hit by it as their incomes increased over time because of inflation, not because they were better off financially.
Congress annually tweaks the tax (known as a "patch") to ensure it doesn't affect most middle-class taxpayers.
If Congress enacts a similar patch for the medicare tax, revenue projections for the levy may not be met as many taxpayers would no longer be required to pay the tax.