With the Senate “cooling” to a proposal to raise money for health care reform by placing a cap on employer-provided (and with the Senate dismissing the Obama administration’s proposal for limiting itemized deductions for the richest Americans), the Senate Finance Committee is scrambling to find alternative sources of revenue.

One of the many options that the committee reportedly has on the table for covering a portion of the $1.5 trillion cost is applying a 1.45 percent Medicare tax to capital-gains and other non-wage income:

The proposal, modeled after a plan released this week by Citizens for Tax Justice, would force people living off investments to contribute taxes to the health-care system, said Steve Wamhoff, legislative director for the Washington research group…“If the only income Paris Hilton gets is capital gains, stock dividends, interest and other types of investment income, currently she is completely exempt from the one big tax we have right now that is dedicated to health care,” Wamhoff said. “We’re saying that probably doesn’t make sense.”

Estimates show that the measure would raise $100 billion over 10 years, but “the proposal is sure to draw fire from Republicans.” “Any proposal that increases the tax on capital income will ignite supply-side conservatives in opposition, as capital gains taxes are enemy number one,” said said Alex Brill, an economist at the American Enterprise Institute. “This is a tax increase that is easy for Republicans to attack.”

It might be an easy tax increase for Republicans to attack, but it should be an easier one for Democrats to defend. The Medicare payroll tax is the “one important tax we already have that is dedicated to funding health care, but it completely exempts wealthy investors whose income takes the form of capital gains, stock dividends, and interest.” Plus, dividends and long-term capital gains are currently taxed at a far lower rate than income earned by other means, with taxpayers in the 25, 28, 33, and 35 percent income tax brackets paying 15 percent. Before the Bush tax cuts of 2003, the capital gains and dividends rate for people in these brackets was 20 percent.

According to an analysis by Citizens for Tax Justice, if this change occurred, “most Americans would either see no tax increase at all or would see a tax increase of less than $100 a year.” More than 64 percent of the increase would be paid by the richest one percent of Americans, and more than 80 percent would be paid by the richest five percent. And for the tax to not unfairly hit moderate income seniors who live off of investment, some sort of senior exemption would need to be included.

Newt Gingrich’s for-profit Center For Health Transformation is sending around a petition email asking “whether members of Congress writing such legislation would actually enroll themselves in a new government-run healthcare option.” “Please sign below if you agree with Congressman Fleming that members of Congress who vote for a government-run healthcare plan should participate in the plan themselves and you agree with us to broaden this to include congressional staff,” the Center asks:

As health legislation continues to be debated, one has to ask whether members of Congress writing such legislation would actually enroll themselves in a new government-run healthcare option. Current draft healthcare legislation exempts members of Congress from the public plan option, allowing them to keep their existing plans.

Congressman John Fleming (LA-04) is asking this very question noting that public servants should be accountable and responsible for what they are advocating. He has created a resolution calling on members of Congress who support a public option to enroll themselves and encourage their colleagues to do the same. We support this resolution and broaden it to include congressional staff as well.

Of course, the Tri Committee discussion draft in the House does not specifically exempt federal employees — who receive coverage through the Federal Employees Health Benefits (FEHB) Program — from enrolling in the new public plan. Rather, the legislation treats the American government — the largest employer in the country — like any other large employer: it can enroll its employees in the Exchange (where they can choose a public health insurance option) after a period of 2 years.

From a logistical point of view and to those concerned about continuity of care, moving the 160 million Americans who receive employer-sponsored benefits into new plans would be a costly nightmare. The goal is to reduce immediate shifts but still preserve choice. For this reason, the House Tri Committee health care bill phases in participation in the Exchange when it goes into operation in 2013:

– Individuals and employers with 10 or fewer employees in 2013
– Individuals and employers with 20 or fewer employees in 2014
– Individuals and employers with more than 20 employees in 2015

On the whole, this argument is particularly disingenuous. Republicans are arguing that the public option would eliminate employer-sponsored coverage while undermining provisions designed to allow Americans to keep what the have. During mark-up of the HELP Committee’s legislation Sens. John McCain (R-AZ) and Tom Coburn (R-OK) went so far as to introduce amendments that would require members of Congress (and Congressional staff) to enroll in the public option.

The fifty-member Blue Dog Coalition has written a letter to House Speaker Nancy Pelosi (D-CA) revealing “strong reservations” about the Tri Committee’s health care bill. “After reviewing the draft tri-committee health care reform proposal, we believe it lacks a number of elements essential to preserving what works and fixing what is broken,” the letter reads:

- Deficit Neutrality: “Paying for care reform must start with finding savings within the current delivery system and maximizing the value of our health care dollar before we ask the public to pay more.”

- Delivery System Reform: “The discussion draft fails to include adequate structural changes that will succeed in lowering costs and increasing value.”

- Rural Health: “We must not fail to address the underlying problems and inequities that plague rural providers.”

- Public Option: “A Medicare-like” public option would negatively impact hospitals, doctors and patients…using Medicare’s below-market rates would seriously weaken the financial stability of our local hospitals and doctors.”

Democrats have already committed themselves to fully funding health care reform and the President has identified $632 billion worth of savings from within the system. Rahm Emanuel, who visited the Capitol twice this week to discuss health care proposals with House Democrats, has said Obama would prefer that money to pay for the legislation come from within the health care system — as he argued in a letter to Sens. Baucus and Kennedy — and OMB Director Peter Orszag is urging lawmakers to include “further cuts in the Medicare and Medicaid payments that hospitals receive for treating the uninsured. In fact, according to a CBO estimate of the Tri Committee bill, the draft would save some $500 billion from Medicare cuts.

More importantly, the letter contains an inherent contradiction: the Blue Dogs want to find more savings within the system — they’re asking for Delivery System Reforms and “maximizing the value of our health care dollar” — but they’re also asking the bill to spend more on rural health and physician reimbursement. And they are reluctant to support any legislation that moves us towards that goal, causes providers to lose revenue, or regulates the system to improve efficiency.

Consider their objection to a “Medicare-like” public option that reimburses providers 5 to 10 percent above Medicare rates. According to MedPAC, Medicare rates are adequate and consistent with the efficient delivery of services. In fact, over-payments by private insurers to health-care providers drives up overall costs. “Hospitals which didn’t rely on high payment rates from private insurers ‘are able, in fact, to control their costs and reduce their costs when they need to’ and ‘combine low costs with quality,’” Glenn Hackbarth, the chairman of MedPAC, said during recent testimony in front of the House Ways and Means Committee. Moreover, if the public plan pays bloated market rates, it will fail to offer lower premiums within the Exchange, and would cause the government to spend more money on subsidies.

Thus, as Pelosi said yesterday, “squeeze out what you can from the system — savings, savings, savings. … Otherwise the bill is endless.” In this case, the Blue Dogs are slowing down an effort that implements their principles for reform.