WASHINGTON -- Many state and local government workers are learning only now that they dodged a tax bullet when Congress enacted a budget two weeks ago.
The original budget agreement reached by President Bush and congressional leaders last summer would have required 2 million state and local workers -- including thousands in Maryland -- to pay Medicare taxes from which they have long been exempted.
That budget agreement died in the House. When Congress finally passed a 1991 budget in late October, it dropped the idea of taxing these state and local workers, an action largely overlooked except by worker groups which lobbied for it. The news is still percolating through the ranks of affected workers.
"Mandatory Medicare dropped from budget," heralded a publication put out last week by the National Association of Police Organizations, which claims credit for helping kill the tax proposal.
About 1,950 Baltimore County firefighters and police were among the thousands of Maryland workers who would have been affected. The Medicare tax, which pays for hospital care for the aged, would have cost workers up to several hundred dollars a year.
The vast majority of American workers and their employers pay a Medicare income tax of 1.45 percent that is part of the 7.65 percent Social Security income tax. For someone earning $30,000, the Medicare portion of the tax is $435.
Federal law long provided an exemption for state and local employees, including many police and firefighters, who have other retirement plans. The exemption was ended during the Reagan administration for workers hired after April 1, 1986, but that left 2 million who had been hired previously, according to the Congressional Research Service.
The Reagan and Bush administrations had sought to end the exemption on the grounds that it is unfair because many of these workers are eligible anyway for Medicare benefits, through their spouses or by holding other jobs. Requiring them to pay a Medicare tax would have generated $5.2 billion from 1991 through 1995, the government estimated.
But representatives of the workers said it would have been unfair to renege on the deal made during the Reagan Administration that continued the exemption for employees hired before April 1, 1986.
Also, the tax would have been levied on many workers who had alternative retirement health plans and didn't need Medicare, says Jules Bernstein, legislative counsel for the National Association of Police Organizations. "For these people, it would have been taxation without a corresponding benefit."
Bernstein noted that continuing the exemption also saved state and local governments money because they would have had to pay 1.45 percent as well.
For workers paying Medicare taxes, the 1991 budget legislation raises the ceiling on wages subject to the tax from $51,300 to $125,000.