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Negotiators Float Expanding Sources of Medicare Taxes to Pay for Health Bill

House and Senate negotiators are discussing an expansion of their health insurance proposal that would increase the Medicare payroll tax to include other sources of income like investment returns.

The Medicare payroll tax hits only wages. The Senate-passed health care bill would increase a worker's Medicare tax from 1.45 percent to 2.35 percent of income for individuals making more than $200,000 a year and $250,000 for joint filers.

Industry and House Democratic sources confirm that Democrats are discussing an extension of the Medicare tax to dividends and other investment incomes. The thresholds would remain $200,000/$250,000 per year.

An industry source adds the tax would also hit small businesses organized as a pass-through in which a business' revenue is treated as the owner's taxable income.

Sources add these negotiations are still in flux.

The reason Democrats need the money is to fill the gaps that would be created if they reduced the taxes on insurance companies on their priciest benefits -- known as the "Cadillac tax. Negotiators are considering an increase in the threshold. 

The Senate-passed bill would hit insurance companies with a 40-percent tax on family plans worth more than $23,000. Democrats have discussed a new mark of $28,000, though the number remains fluid. Even a slight bump in that threshold exempts enough plans to reduce the revenue estimates of the tax by billions.

According to the Joint Committee on Taxation, the amended and Senate-passed bill forces a 40 percent excise tax on health coverage in excess of $8,500 for individuals and $23,000 for family plans. At that rate, revenue would be $148.9 billion over 10 years.

Union leaders met with President Obama at the White House on Monday to discuss their opposition to the tax. One frustrated union source whose boss attended the meeting said the president's senior advisers "are part of the problem" with changing the tax limits on Cadillac plans because while they know it is flawed they also know of the "pile of new studies that clearly dispute rising health care costs will be controlled by the tax."

Democrat Hill sources on Tuesday indicated that the president's support for the Cadillac tax remains.

Rich Edson joined the FOX Business Network as a Washington correspondent in October 2007.