Medicare faces significant short-term and longer-term financing challenges. The Hospital Insurance (HI) trust fund finances Medicare Part A (mostly hospital services). Over 10 years, HI spending is projected to exceed HI revenues by a cumulative amount of $369 billion. Without legislation addressing the deficit, Medicare would be unable to make full and timely payments for hospital care, as the HI trust fund is projected to be exhausted in 2033. Ways to increase revenues include extending the HI and Net Investment Income Tax (NIIT) tax bases. This brief reviews the evolution of these tax bases and examines which types of income are subject to the HI taxes or the NIIT.

Main findings: 

• Only about 60 percent of total income is subject to the HI tax or NIIT under current law. Significant categories of compensation and business income remain untaxed.
• Nearly $2.8 trillion in employer contributions to health insurance, pensions, and payroll taxes are excluded from HI taxes, despite being forms of compensation similar to wages. Untaxed employer benefits are broadly distributed across the income distribution, especially among middle income households.
• Roughly $1 trillion in active pass through income is not subject to HI taxes or the NIIT. Untaxed active pass through income is highly concentrated among top income households, especially within the top 1 percent.
• Extending HI taxes to employer provided benefits would raise over $600 billion over 10 years and would affect middle income households the most, as they currently receive the largest share of untaxed benefits.
• Extending Medicare-related taxes to active pass through business income, either by applying the NIIT or expanding the Self-Employed Contributions Act base, would raise between $330 billion and $540 billion over 10 years. 

Other considerations around extending Medicare taxes to these income sources include impact on health care costs, out-of-pocket medical spending, retirement income adequacy, choice of business organization, investment, and labor supply. Policymakers considering expanding the HI/NIIT base will need to make value judgments and weigh tradeoffs between simplicity, equity, and efficiency.