'Deliberate Deception'? Obama Slammed for Surtax

Former Treasury Secretary calls health surtax a 'coverup' for a rate increase.

July 23, 2009— -- President Obama's endorsement of a health care surtax for the richest Americans has renewed criticism of the proposal, including from the man who once lorded over the nation's increasingly complicated tax code.

Former Treasury Secretary Paul O'Neill, a consultant to the financial firm Blackstone Group, called the surtax "deliberate deception."

O'Neill would be among the estimated 400,000 Americans affected by the proposed 5.4 percent surtax but he cited policy objections, not personal finance concerns, for his opposition.

"I have been saying for years that the tax code is proof positive that we are not an intelligent people … There was a more than 10,000 page tax code when I was the secretary of the Treasury. So President Obama's idea to add another surtax is just more of the same. From an individual point of view the thing that matters is, what is your total tax bill," O'Neill wrote in an e-mail to ABCNews.com.

"If a surtax for medical care is a good idea, why don't we have a surtax for national defense? Agricultural subsidies? Housing subsidies? Medical research? Education? The White House operations including the chef? Pay for the members of Congress?" he said. "The surtax idea is a coverup for a rate increase. Perhaps it is true that the people who will pay the tax are too stupid to understand what is happening to them, otherwise how can you explain how a very intelligent president would advocate this deception?"

"I will not make a case against higher taxes but I am offended by deliberate deception," he said. "...[T]he current tax code is unenforceable because of its complexity. If a clean code caused my taxes to increase that would be fine with me."

In a primetime press conference last night, Obama voiced support for levying a surtax on families with incomes above $1 million a year..

"To me, that meets my principle that it's not being shouldered by families who are already having a tough time," he said.

Overall, wealthy Americans in some states will take bigger hits than others if the surtax is made law.

Take for instance, Eugenia, a California homemaker whose husband works in finance. The Bay Area woman, who asked that her last name not be used, said her husband's income usually tops $1 million per year.

California taxes its top income earners more than 10 percent, meaning that between state taxes, federal taxes, Medicare taxes and the proposed health care surtax, the couple would face a total tax rate of more than 56 percent on part of their income.

"It's very sad, because my husband works almost 12 hours per day and can take only two weeks of vacation, and then he's getting less than half of what he's working for," Eugenia said. "On top of everything, we're going to pay for everybody else's health insurance."

The proposed health care surtax now making its way through Congress is a three-tiered plan requiring a 5.4 percent surtax for couples with an adjusted gross income of more than $1 million and individuals with an AGI of $800,000. Households with an AGI between $350,000 and $500,000 would face a 1 percent surtax and those with an AGI between $500,000 and $1 million would face a 1.5 percent surtax.

Worst States for the Rich

According to a report this month by the Tax Foundation, a tax research group based in Washington, D.C., wealthy taxpayers in 39 states could pay a top tax rate higher than 50 percent by 2011. The report combined states' average local tax rates, top state and federal rates with the 2.9 percent Medicare tax and the proposed 5.4 percent health surtax.

Just more than 400,000 households nationwide would be hit by the 5.4 percent surtax, according to Tax Foundation projections. But opponents of the surtax still worry that the additional tax burden would have a disastrous impact.

"We're looking at serious economic consequences -- tax avoidance, people leaving these states, a shifting income capital game," said Rea Hederman, Jr., a senior policy analyst with the conservative Heritage Foundation. "The fact is [that] we still have trillions of dollars in deficit. We can't tax the rich forever."

Surtax defenders, meanwhile, are singing a different tune.

"The public pretty much thinks the richer people in America ought to pay their fair share; they don't think they're paying their fair share," House Majority Leader Steny Hoyer said recently on ABCNews.com's "Top Line."

Under the plan, according to projections done for the Associated Press:

A family of four making $450,000 a year would pay $103,600 in federal income taxes, an increase of $1,000.

A single filer making $450,000 a year would pay $112,200 in federal income taxes, an increase of $7,100.

A family of four making $800,000 a year would pay $220,800 in federal income taxes, an increase of $30,000.

A single filer making $800,000 a year would pay $231,300 in federal income taxes, an increase of $30,700.

A family of four making $5 million a year would pay $1.81 million in federal income taxes, an increase of $443,500.

A single filer making $5 million a year would pay $1.83 million in federal income taxes, an increase of $452,000.

Here are, according to the Tax Foundation's report, the 10 states that would see the highest combined top-income tax rates if the surtax becomes law.

1. Oregon: 57.54 percent

Why is Oregon at the top of the list? Both state taxes and municipal income taxes are to blame. Oregon's legislators recently approved provisions for a new tax income rate of 10.8 percent for individuals with taxable incomes higher than $125,000 and an 11 percent top rate for the state's wealthiest. Lawmakers said the increase would raise $488 million to help balance the state budget.

Oregon is also one of more than just a dozen states in the country that has municipal income taxes. Municipal income taxes average 0.36 percent in the Beaver State.

Tax Hits From Coast to Coast

2. Hawaii: 57.22 percent

Like Oregon, Hawaii's tax rate for its richest resident is 11 percent. But what saved the Aloha State from making the top of this dubious list is that it doesn't have municipal income taxes.

But Hawaii does have a lot of is tax brackets: In May, state legislators voted to add three more income tax brackets, bringing the number of brackets to 12 -- the highest in the country -- and that includes the highest tax bracket of 11 percent.

Previously, the top tax rate was 8.25 percent for individual taxable incomes of $48,000 and couples' incomes of $96,000.

3. New York: 56.92 percent

The combined total top tax rate for the Empire State would be just shy of 57 percent if the surtax became law, but New York City's elites would be hit harder. The city levies its own local income tax of 3.65 percent for the richest Big Apple dwellers, including Mayor Michael Bloomberg, media mogul Rupert Murdoch and designer Ralph Lauren. Thanks to that tax, these and other New Yorkers would pay a top combined rate of 58.68 percent.

According to the Tax Foundation, states with densely populated areas of wealthy people will have some of the highest combined top income tax rates under the surtax.

4. California: 56.58 percent

Looking to commiserate on taxes with a fellow billionaire? California would be a good bet. More billionaires on Forbes Magazine's 2008 list of the 400 richest Americans live in California than in any other state.

California's big-earners include Oracle CEO Lawrence Ellison (the third-richest man in the U.S., according to Forbes) and Google's co-founders, Sergey Brin and Larry Page.

In February, the state voted to increase the highest tax rate on taxable income greater than $1 million from 10.3 percent to 10.55 percent. Legislators also voted for a 0.25 percent increase for all tax rates through the end of 2010.

5. Rhode Island: 56.22 percent

The nation's smallest state also has some of the biggest tax rates. Rhode Island's top tax rate of 9.9 percent applies to taxable incomes greater than $372,950.

But some of Rhode Island's wealthiest benefit from the state's optional flat tax. Instead of paying the top rate, taxpayers can choose to pay the flat tax rate, currently at 6.5 percent and expected to fall to 5.5 percent by 2011, but cannot take any exemptions or deductions. In June, state legislators voted against raising the flat tax rate to 7 percent.

6. Maryland: 55.61 percent

Like Oregon, municipal income taxes earned Maryland a spot on this list. Local rates are highest in Montgomery and Howard counties, and some cities including Baltimore and Bethesda levy their own income taxes.

In 2008, Maryland's "millionaire tax" raised the top income tax rate to 6.25 percent, but left alone the 5.5 percent tax for individuals in the next lowest tax bracket (those making more than $500,000). A year later, one-third fewer millionaires were found on Maryland's tax rolls, the Baltimore Sun reported. Many believe that some of the state's wealthiest moved to neighboring and lower-tax state of Virginia.

7. New Jersey: 55.46 percent

The Tax Foundation lists the Garden State's expected 2011 top tax rate at 8.97 percent, and that was the number the group used in calculating the more than 55 percent combined rate for top-earners.

But it could be worse: In June, New Jersey Gov. Jon Corzine, himself a millionaire, approved an increase of the state's income tax rate for the 2009 tax year to 10.75 percent for incomes more than $1 million. It's unclear whether the state government will try to preserve that rate in future years.

8. Vermont: 55.36 percent

Though the Green Mountain State has among the highest top rates in the country, Vermont's rates have been on the decline. In June, state lawmakers voted to drop the top rate from 9.5 percent to 9.4 percent for taxable income higher than $372,950.

The rate will drop to 8.95 percent in 2010.

9. Minnesota: 54.36 percent

Suffering from a $2.7 billion deficit, Minnesota is one of few states that has not raised taxes to balance its budget. Earlier this year, Gov. Tim Pawlenty vetoed a bill calling for $1 billion tax increase and a temporary top rate increase to 9 percent for individual incomes over $141,250.

The state's current top rate of 7.85 percent applies to individuals with taxable income greater than $74,650 and couples with greater than $131,970.

10. Idaho: 54.32 percent

Idaho rounds out the 10 highest combined rates list with a state income tax rate of 7.8 percent -- just a little lower than Minnesota. But most Idaho residents in the state's top tax bracket wouldn't be snared by the health care surtax. Taxable income as low as $24,736 is taxed at the 7.8 percent rate.