Speaking to reporters shortly before a meeting of House Democrats on January 13, Charles Rangel, the New York Democrat who chairs the House Ways and Means Committee, which has jurisdiction over tax legislation, explained that a proposal to extend the Medicare payroll tax to income such as capital gains, dividends, rents and royalties is preferable to an excise tax on high-cost "cadillac" health insurance plans favored by Democrats in the Senate.

Under the Senate version of the health care reform legislation, approved on December 24, a 40% excise tax would be imposed on insurance companies and plan administrators for any health coverage plan with an annual premium that is above the threshold of USD8,500 for single coverage and USD23,000 for family coverage.

House Democrats are worried that the excise tax plan could hit middle class Americans in the pocket at a time when many are already struggling amid the economic downturn. The tax on "cadillac plans" has also drawn the ire of labor unions with links to the Democrats who fear that the measure would simply encourage insurers to reduce coverage in order to avoid the levy.

In a letter to key lawmakers helping fashion final health care legislation, a coalition of organizations representing federal employees and retirees said the proposed excise tax would hit “the average blue collar and white collar employee or annuitant.”

If such a tax is imposed, “FEHBP insurers will simply reduce coverage and, as the taxes increase, a downward spiral toward less coverage will ensue, which is antithetical to health care reform’s stated purpose,” the letter said in urging Congress to drop the provision.

The additional tax on investment income is seen by House Democrats as an acceptable compromise because it would be less regressive and affect mainly wealthy taxpayers.

The House version of the legislation is paid for in part by a contentious "surtax" of 5.4% on individuals and couples with annual income of USD500,000 and USD1m respectively. This proposal has drawn much opposition in the Senate and has not been included in its version of the health care bill.

House and Senate leaders must resolve their differences on the varying aspects of the legislation before it can be signed into law by President Obama.