Senate Democrats reach an agreement to raise taxes on some high earners

WASHINGTON — Senate Democrats have reached an agreement to raise taxes on some high earners whom they say are abusing a loophole to slash their tax bills, two sources familiar with the discussions told NBC News.

The lawmakers, the sources said, plan to close the tax break for those earning more than $400,000 a year, requiring them to pay 3.8 percent in taxes on certain income from pass-through businesses, in what is effectively a slimmed-down package after the Build Back Better Act stalled last year.

They expect that closing the tax loophole will raise about $200 billion over a decade, one source said, and the money will be used to pay for Medicare through 2031, in an effort to keep the federal health care program from going bankrupt.

Without congressional intervention, the program’s hospital insurance trust fund is poised to begin running out of money by 2028.

Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Joe Manchin, D-W.Va., have been privately negotiating a bill that would include prescription drug savings — which they’ve reached an agreement on — as well as energy and climate funding and tax increases. They haven’t struck a deal on the package and it’s unclear if they will.

The tax proposal will be submitted in the coming days to a Senate official to ensure it complies with the complicated rules of a special budget process, one source said, which would allow Democrats to pass it with a simple majority.

Pass-through entities can be sole proprietorships or partnerships. For example, a partner in a law firm can claim a portion of their income as salary and the rest as distributed profits — and pay fewer taxes as a result. The new plan seeks to curtail that.

The proposal “would ensure that high-income owners of certain pass-through businesses pay the 3.8 percent net investment income tax (NIIT) on their income to fund health care,” said a source familiar with the proposal. “Keeping with President Biden’s promise not to raise taxes on anyone earning under $400,000, the pass-through NIIT proposal applies to individuals earning more than this amount and to joint filers, trusts, and estates earning more than $500,000.”

Democratic leaders believe the latest proposals have the support of all 50 senators in the caucus, the source said.