What a Long Strange Trip It’s Been for the 3.8% Net Investment Income Tax

Ausher M.B. Kofsky and Bryan P. Schmutz

This Article will analyze the surprisingly significant public policy implications of the 3.8% net investment income tax (“NIIT”). The analysis of this topic is one of first impression. In brief, the NIIT is a peculiar, diminutive, and federal income tax that imposes a flat 3.8% surtax on high income taxpayers’ investment income. Introduced to fund the expenses in the Affordable Care Act (“ACA”), the NIIT was alternately titled as the Unearned Income Medicare Contribution and the Medicare Contribution Tax on Unearned Income.

The impetus for the Article was the specific singling out of the NIIT in a May 2017 bill that the Republican Party-majority House of Representatives passed in conjunction with the then newly elected Trump Administration. The NIIT was a relatively new tax, becoming effective only four years earlier. The House’s 2017 bill proposed to eliminate the NIIT as one of a slew of health-care-related tax cuts totaling $569 billion over ten years. The legislation was part of the Republican’s initial attempt to repeal and replace the ACA, which the Obama Administration and a then Democratic Party-majority Congress enacted in 2010. The NIIT was the only income tax in the May 2017 proposed cuts, and at a ten-year projection of $172 billion, the NIIT was the single largest revenue loss in the bundle.10 The House effort died in the Senate in July 2017.