Prime Minister Julia Gillard on Wednesday announced details of the levy increase, which starts on July 1, 2014, saying the money raised will go into a special national fund.
'The choice that I and my colleagues have made is that DisabilityCare Australia should be supported by a 0.5 per cent increase in the Medicare levy,' she told reporters in Melbourne.
This would take the total annual Medicare levy on wage earners to two per cent.
Under the change, an average worker on $70,000 a year would pay the equivalent of $1 a day, Ms Gillard said.
The government then intends to use some of the money going into the special fund to make grants to the states and territories under 10 year arrangements.
A quarter of the total would be given to those governments to help them build up to running the full disability care scheme across the nation.
After 10 years, there'll be a review of the funding share between federal, state and territory governments.
Ms Gillard says she'll take the levy increase plan to the next election due on September 14, after last year ruling out such a change.
She says the amount of tax money coming to the government isn't what they expected, adding that it's also clear the states need extra help to afford their share of the scheme.
The prime minister's acknowledged it's not an easy choice to make for Australian taxpayers, but it is the right one for people with disabilities and their families.
Ms Gillard stressed the money raised from the Medicare levy increase would not cover the complete cost of the disability care scheme when it was fully operational.
'The government will need to make savings for that full cost and there will be no free ride for states and territories - they'll need to step up too,' she said.
Treasurer Wayne Swan said money would accumulate in the fund during the early years from mid-2014, ready to 'kick-start' the scheme when it came into full operation in 2018/19.
The accumulated money would total about $20 billion.
The scheme will cost $8 billion a year, while the levy measure will raise about $3 billion.
Disability reform minister Jenny Macklin also tried to allay the fears of families worried about reports the government was planning changes to the disability support pension in the May budget.
'There will not be further changes to the disability support pension in the coming budget,' she said.
She noted changes to the pension in recent years had led to a drop in the number of new pension recipients.
'Major changes have been delivered but I do want to reassure those people who need the disability support pension ... that this very important part of the social security safety net will remain.'
Mr Swan said he expected some 'political pain' to come from the plan to raise the Medicare levy.
'There's a greater public good here,' Mr Swan said.
Ms Gillard said it was the right decision for Australia's future.
'I know I'm asking Australians in their millions to step up and pay an increase in the Medicare levy,' she said.
'Australians will be able to ask of themselves that question when they vote in September - whether or not they think it's worthwhile, just like Medicare is, when we all contribute and we all benefit to have DisabilityCare.'
'We are prepared to fight for this,' she said.
Legislation to support the levy rise would likely be considered by the next parliament.
'Obviously, we will see what the responses are in the parliament as to what people's dispositions are on the legislation but I anticipate the legislation will need to be dealt with in the next parliament,' Ms Gillard said.
The plan is expected to fund about 60 per cent of the commonwealth's additional expenditure for the scheme, Mr Swan says.
It will raise $3.2 billion for NSW, $2.3 billion for Victoria, $1.9 billion for Queensland, $976 million for WA, $727 million for South Australia, $216 million for Tasmania, $192 million for the ACT and $92 million for the Northern Territory.
'It's the same proposition that Labor fought for election after election ... on Medicare, which is that we all contribute and we all share,' Ms Gillard said.
Ms Gillard said federal Opposition Leader Tony Abbott also needed to step up.
'Mr Abbott needs to shoulder that burden too and if he's got a different way of doing this, spell out every dollar and every cent,' she said.