By Brett Ferguson, Heather M. Rothman, and Alison Bennett
President Obama's $3.7 trillion budget proposal for fiscal year 2012 relies on dozens of ideas that have been previously rejected by a Democrat-led Congress and will face an even tougher road ahead under a new, larger Republican presence in the Capitol, lawmakers said Feb. 14.
In his Feb. 14 budget submission, Obama renewed his pledge to extend the 2001 and 2003 tax cuts for only middle-income families at a cost of $1.25 trillion over the 2012-2021 period, as well as extending the estate tax law that was in place for 2009, where the exemption level was $3.5 million and the tax rate was 45 percent at a cost of $270 billion over 10 years.
It also includes a $59.8 billion provision to renew and reform the lapsed Build America Bonds program, a $30 billion “Financial Crisis Responsibility Fee,” and a repeal of about $20 billion in tax incentives given to the oil and gas industry. All of those ideas were unable to win the support of all of the Senate's Democrats in the 111th Congress and have already been rejected by Republicans controlling the House for the 112th Congress.
The few new proposals offered included a plan to make portability of the unused estate tax exemption between spouses permanent, exclude from income student loan forgiveness on certain loans from the National Health Service Loan Repayment Program, and make the Federal Unemployment Tax Surtax permanent and raise the cap on the earnings subject to the tax from $7,000 to $15,000.
Both Democratic and Republican lawmakers expressed disappointment that Obama's budget did not offer any long-term proposals to deal with tax reform or deficit reduction.
Lawmakers Urge Tax Reform
“In the face of record-high deficits and continued high levels of unemployment, a budget that imposes massive job-killing tax hikes on small businesses and fails to address entitlement reform or tax reform is hardly the answer,” said House Ways and Means Committee Chairman Dave Camp (R-Mich.) “Rather than setting the stage for broad-based, pro-growth tax reform, this budget goes in the opposite direction with more tax hikes.”
Camp called on Obama to instead focus on working “openly and honestly with Congress on substance reforms.”
“Mr. President, rather than waiting to see who goes first, let us tackle these challenges together,” Camp said.
‘Tax Reform Has to Be Revenue Neutral'
Eric Solomon, a former Treasury assistant for tax policy who now heads the National Tax Department at Ernst & Young LLP, Washington, D.C., said the administration's decision not to include a tax reform provision in the budget was “clearly telegraphed” beforehand. “I think there was no provision because it requires a longer term debate and discussion. It's not, to me, surprising.”
At the same time, he noted that the president called on Congress to start the tax reform discussion and build on the work of the 2010 fiscal commission. With regard to reform, Solomon said, “I think it can't be done without dealing with the spending side.”
While an oft-cited option for reform is simplifying the tax code and lowering the rate, Solomon noted, “The administration is clearly signaling that tax reform has to be revenue neutral in the corporate tax arena. That puts a limit on how far you can bring the rate down.” He said that according to a Treasury Department study in 2007, even if all corporate tax expenditures were repealed, it would only get the rate to 31 percent, with an extra 2 percent cut if the deduction for accelerated depreciation were taken away.
Treasury officials defended the budget, saying the president opted not to include tax reform proposals in the budget because the administration wants to continue its dialogue with American companies, individuals, and members of Congress.
Minor Simplification Proposals
Ed Karl, vice president of taxation for the American Institute of Certified Public Accountants, told BNA that the budget proposal's lack of significant tax reform ideas will disappoint many people, but said there were a few minor tax simplification proposals that will be welcomed by tax professionals.
The tax simplification proposals include plans to reduce some of the administrative hurdles for handling individual retirement accounts, managing the preferential dividend rule for publicly traded real estate investment trusts, and simplifying certain issues for tax-exempt bonds.
“They are some in more obscure areas, but they'll nevertheless be helpful,” Karl said. “We tend to look at simplification in how it applies to large volumes of taxpayers, but any reduction in complexity is worthwhile.”
To help people put more money into savings accounts, Obama resurrected a proposal from the last two years to require employers with more than 10 workers to give employees an option to automatically put money into individual retirement accounts.
In a new spin to reduce the complexity of IRAs, however, Obama offered a new proposal to eliminate minimum required distribution rules for IRAs or annuity plan balances of $50,000 or less. Obama also proposed to allow all inherited annuity plans and IRAs to be rolled over to nonspouse beneficiaries within 60 days without any adverse tax consequences.
Financial Crisis Responsibility Fee Revised
On the business tax side, the president's budget still contains a plan to assess a tax on the “covered liabilities” of the largest financial institutions operating in the United States, but the goal has shifted away from its focus on recouping potential losses from the Troubled Asset Relief Program and, instead, will largely seek to discourage excessive risk taking.
And much like his first two budget proposals, Obama called for making permanent the research and development tax credit, but in a twist, this year he also called for expanding it, which would make the proposal cost $106 billion over 10 years. The way the credit is currently structured, taxpayers must choose between taking a 20 percent credit that Treasury and businesses find difficult to calculate or a “simpler” alternative research credit of 14 percent. Obama's proposal would increase the rate to 17 percent beginning Jan. 1, 2012.
Obama also included in his budget language to make permanent a 100 percent exclusion for capital gains from the sale of small business stock held for at least five years, saying it would encourage and reward new investment in qualified small business stock. The provision, which would take effect for all qualified stock acquired after Dec. 31, 2011, would cost $5.4 billion over 10 years.
On the international front, Obama proposed a broad-ranging package of international tax provisions that would raise $129 billion over 10 years. The package includes provisions offered in previous years to limit deferral only to interest expenses, to calculate the foreign tax credit on a “pooled” basis, and to treat as Subpart F income “excessive returns” on income from intangibles shifted out of the United States to related controlled foreign corporations subject to a low effective tax rate.
Promote Regional Growth
Labeled as an incentive to promote regional growth, the budget also would extend and modify the New Markets Tax Credit for one year through 2012 and allow the credit to be used to offset alternative minimum tax liability. The amount of money authorized for the credit would be returned to the $5 billion level that Congress had established in the American Recovery and Reinvestment Act (Pub. L. No. 111-5), up from the $3.5 billion extension that congressional negotiators settled on in December.
AMT Indexing, International Provisions
On the individual side, Obama proposed indexing to inflation the current exemption levels for the alternative minimum tax, to keep it from ensnaring more middle-income families. But the offset Obama proposed to pay for the AMT patch—curbing the rate that high-income taxpayers use to itemize tax deductions—was soundly rejected the last two years and is expected to receive the same treatment this year, especially now that Republicans control one branch of Congress.
That proposal includes limiting the deduction on charitable donations and the popular mortgage interest deduction to 28 percent for households earning more than $200,000 ($250,000 for couples).
The budget also reiterates Obama's calls for individuals earning more than $200,000 per year to face income tax rates of up to 39.6 percent beginning in 2013. For everyone else, the lower tax rates created in 2001 under the Economic Growth and Taxpayer Relief Act would be extended permanently. The budget would also raise the capital gains tax rate and the dividends tax rate from 15 percent in 2010 to a maximum of 20 percent in 2013.
Form 1099 Rules Only Partially Repealed
One surprise in the budget came in the president's proposal to repeal—then partially replace—the Form 1099 rules from the Patient Protection and Affordable Care Act (Pub. L. 111-148). The proposal would eliminate the requirement that businesses report purchases of goods to the IRS, but would still require payments to corporations for all services to be reported. A separate provision from the Small Business Act (Pub. L. No. 111-240) affecting landlords for services done at rental units would not be repealed in the administration's proposal, a Treasury official said. The proposal would raise $9 billion for the government over 10 years, Treasury said.
The complete text of this article can be found in the BNA Daily Tax Report, February 15, 2011.
© 2011, The Bureau of National Affairs, Inc.