Reprinted From The ADVANTAGE Volume: XVIII, Issue: VIII
Cutting Taxes on Social Security Benefits
On July 27, 2000, the House of Representatives passed H.R. 4865, the "Social Security Benefits Tax Relief Act", which would repeal a portion of the income taxes assessed on Social Security benefits. The bill was sponsored by the Republicans and passed by a margin of 265-159.
Presently, individuals with an annual income between $25,000 and $34,000 and couples with annual incomes between $32,000 and $44,000 pay taxes on up to 50% of their Social Security amounts. Furthermore, once the income thresholds reach beyond the $34,000 and $44,000 respective amounts, there is a "second tier" tax that is assessed on up to 85% of Social Security benefits. The current taxes are a result of a law enacted in 1993.
H.R. 4865 would essentially repeal the "second tier" portion of the 1993 law. The new bill proposes that the tax assessed on 50% of Social Security benefits for individuals earning over $25,000 and couples
earning over $34,000 would remain in tact. The "second tier" tax, however, would no longer exist. Republicans argued that the "second tier" tax was unfair to Social Security recipients. Meanwhile, Democrats
argued that revenues generated from the "second tier" tax would be lost. These revenues are presently earmarked for the Medicare Trust Fund for the elderly.
In response to this argument and in consideration of the present budget
surplus, H.R. 4865 requires that the lost revenues be replaced with surplus amounts to compensate for the shortage of funds in the Medicare Trust Fund. It was also proposed that calculations be done on an annual
basis to estimate the amount of revenue that would have been generated if the "second tier" tax had not been repealed. These amounts shall be transferred from the budget surplus and added to the Medicare Trust
Some argue that the transferring of funds would cause a drain on the budget surplus. Furthermore, the budget surplus could be redirected to other programs for the elderly such as prescription drug benefits and
shoring up Social Security. There has been no further action on H.R. 4865, and thus, the "second tier" tax remains in effect today.
by: Davidow, Davidow, Siegel & Stern