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Closer look at Bush's budget finds unadvertised tax traps

WASHINGTON—In a bid to raise revenues ahead of a projected financial crisis for Social Security and Medicare, President Bush is proposing a number of measures that could become tax traps for millions of Americans.

Critics allege that Bush is using sleight-of-hand measures that tinker with complex funding formulas linked to the inflation rate. These measures, which include changes affecting Medicare, Social Security and income taxes, aren't advertised as tax increases. But just like hidden tax hikes, they'd raise revenue from millions of unsuspecting taxpayers.

Right now, for example, individual seniors with annual incomes greater than $80,000 and couples with incomes greater than $160,000 pay premiums on a sliding scale for medical services covered by Medicare. The more income beneficiaries have above those thresholds, the less of the bill the government foots.

But under Bush's proposed fiscal 2008 budget, released on Monday, these income thresholds no longer would be indexed to, and rise with, the rate of inflation. As a result, as nominal income rises over time with inflation, more and more people would meet the formula's definition of higher income.

How many more? Leslie Norwalk, the acting administrator of the federal Centers for Medicare and Medicaid Services, said this week that 1.7 million seniors would be affected by 2017.

"By not indexing, what effectively you are doing is lowering these thresholds so that over time, more and more people will be affected by these higher premiums until eventually everyone is," said David Certner, the director of legislative policy for the AARP, the lobby for older Americans.

The Bush budget also proposes first-ever upper-income thresholds for Medicare's prescription-drug program and freezing those thresholds so they won't rise with inflation.

"I think it's a way to have policy changes hidden and not explicit," said Edwin Park, a health policy analyst for the liberal Center on Budget and Policy Priorities. "Instead of changing the thresholds directly, the administration is limiting the indexing."

By preventing income thresholds from rising over the next decade and snaring more middle-income seniors, Bush seeks to raise revenues ahead of a monumental demographic shift. In 2011, the first wave of baby boomers—roughly 76 million Americans born between 1946 and 1964—become eligible for Medicare. They'll strain the federal health system's finances as never before.

To face the challenge, Bush proposes "means testing," or applying a wealth gauge, to force the better-off to shoulder more of their bills. The unadvertised catch is that over time these measures raise more revenue from the middle class.

"You don't save a lot of money unless you apply it to the middle class," said Bob Bixby, the executive director of The Concord Coalition, a bipartisan policy organization formed to warn of fiscal challenges facing the nation. "I applaud them for tiptoeing in this direction, but people should understand that means testing doesn't mean a whole lot if you just apply it to upper-income people."

A more direct way of dealing with the problem would be raising taxes or cutting spending to meet the coming Medicare and Social Security crunches. But Bush opposes tax increases. And Democrats oppose spending cuts in programs that affect seniors, who pay attention to these things—and who vote.

Tinkering with indexation is a way to raise revenues without raising taxes.

In his budget, Bush also endorsed another idea for shoring up Social Security's finances—through an indexing mechanism that seeks to slow the growth rate of future retirement benefits.

Social Security now calculates an individual's retirement benefits using a complex formula that includes the average rise in wages over the time the person was in the workforce.

Bush's proposal would link the value of future benefits for wealthier taxpayers to the growth rate of inflation over the same period. Historically, prices have grown more slowly than wages, so the future benefits would be less. But many Americans wouldn't see a difference until they began collecting retirement benefits.

In addition, there's an important but little-noted hidden tax in the president's budget. It involves Bush's proposal to treat employer-provided health insurance as taxable income.

The president's plan aims to treat individuals who buy their own health insurance like those who get it from their employers. Bush would give all Americans a $15,000 deduction for health insurance on their federal taxes. He'd tax as income the portion of any employer-provided plans valued at more than $15,000.

The Bush plan addresses a longstanding inequity. Those with employer-provided insurance effectively get a tax break because they pay premiums with pre-tax income. Not so for the self-insured, who pay out-of-pocket without similar tax benefits.

The $15,000 tax deduction would rise with the rate of consumer-price inflation. But medical-price inflation is growing almost twice as fast as the consumer price index is, rising 4.17 percent annually from 1999 to 2006, according to the Labor Department.

The Bush administration estimates that 19 percent of Americans with employer-provided health plans would pay taxes in 2009, when it's proposed to take effect. Over a decade, the number exposed would rise to 31 percent, according to the Tax Policy Center, which is sponsored by two center-left think tanks, the Brookings Institution and the Urban Institute. Treasury Department calculations show it raising $53 billion in 2017.

"One of the side benefits of that proposal, from a long-term fiscal perspective, is that it actually raises revenues. It's done in such a way that it's not an explicit tax increase," said Bixby, who thinks the proposal intends to give Democrats political cover, too. "It's a tax reform that happens to lead to more revenues. I think the significant thing about it is it's a way of putting revenues on the table without Bush saying, `My tax cuts are on the table.'"

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(c) 2007, McClatchy-Tribune Information Services.

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