Obama's Tax Priorities Shift Modestly to Reflect Gloomy Deficit Outlook
By Brett Ferguson and Christine Grimaldi
Publication date: 02/02/2010
The vast majority of President Obama's tax policy priorities were left unchanged in his fiscal year 2011 budget unveiled Feb. 1, but the handful of modifications reflect some of the hard decisions he has to confront with an expected $1.56 trillion budget deficit.
One such change was to abandon his plan for the Making Work Pay tax credit to become permanent, instead opting for a simple one-year extension of the credit to take it through 2011. The one-year extension would cost $61 billion, while making the credit permanent was estimated to cost more than $535 billion over 10 years.
Another was a modification to the Build America Bonds program, which subsidizes interest costs for state and local governments to improve their ability to finance infrastructure projects. The Obama administration is proposing to allow the Build America Bonds to be used to finance a wider range of projects, including the construction of buildings to be used by nonprofit groups, but the subsidy rate would drop to 28 percent from 35 percent—a level that Treasury Department officials said would make the program “revenue neutral” over 10 years.
At the same time, Obama called for most of the same revenue-raising provisions sought in the fiscal 2010 budget and added in a couple of new proposals, such as the repeal of tax code preferences for the coal industry. Another proposal would close a potential “loophole” for paper producers to claim a new $1.01 per gallon cellulosic biofuel producer credit for their use of a pulp byproduct known as “black liquor” to power their plants. Prohibiting the use of the tax credit for black liquor would raise $24 billion and repealing tax breaks for the coal industry would raise $2.3 billion over 10 years.
Uphill Battle on International Proposals
The Obama administration was also dealt a setback with one of its proposed revenue raisers from 2010—a repeal of the “check-the-box” provision that allows some companies to elect to be treated as a separate entity from their owners, opening the possibility they can shift their earnings to low-tax jurisdictions and avoid U.S. income taxes. Repealing that provision would have raised $90 billion over 10 years, but intense opposition to the proposal prompted the administration to drop the idea from the 2011 budget plan.
In its place, the administration proposed tougher tax treatment on transfers of intangible assets such as trademarks or copyrights to offshore entities. Income derived from “excessive” income shifting would be treated as subpart F income, raising an estimated $27.4 billion over 10 years.
Like the fiscal 2010 budget, Obama also called for increased authority to crack down on tax fraud by writing the “economic substance doctrine” into the tax code, increasing penalties, and requiring more information reporting. The administration expects all of its proposed changes to tax administration and enforcement to raise an additional $25 billion in revenues.
In total, the president's 2011 budget features an expectation that the government can raise $1.1 trillion in additional tax revenues through the new policies, nearly triple last year's plan to produce $387.3 billion in new revenues from tax policy changes.
Major Tax Proposals Telegraphed Early
With the health care overhaul bill stalled in Congress, President Obama and Democratic congressional leaders have already shifted priorities to put more emphasis on what lawmakers are doing to help reduce unemployment and provide assistance to middle-class households.
Obama used his Jan. 27 State of the Union address to highlight most of his major plans for tax policy, focusing largely on short-term changes that could help give the economy a boost later in the year.
The president's budget calls for an extension through 2011 of rules that allow small businesses to write off up to $250,000 of qualified investments and for all firms to more quickly depreciate the value of capital investments. The budget also provides for $5 billion in new tax credits for investments in manufacturing facilities producing “clean energy” products. The credit, which pays for 30 percent of investments made in eligible advanced energy projects, was created in February 2009 as part of the American Recovery and Reinvestment Act (Pub. L. No. 111-5), but the $2.3 billion in credits allocated to the program was only sufficient to fund one-third of the applications received.
The budget proposal also repeated the president's plans to eliminate capital gains taxes for investments in small businesses and, like the 2010 budget, calls again to make the research and experimentation tax credit a permanent feature of the tax code.
Initiatives to Aid Middle-Class Taxpayers
Obama expanded on his 2010 proposal to expand refundability of child tax credit by suggesting that the government boost the child care and dependent care tax credit. The idea, part of a broader initiative to aid the middle class, would boost the tax credit rate to 35 percent of qualifying expenses. Current law provides for a credit of up to 20 percent.
Families could claim up to $3,000 in expenses for one child or $6,000 for two children. The maximum credit for a family with two children making $80,000 a year would increase by $900, from $1,200 to $2,100. The increase would begin to phase out on families earning more than $85,000 per year, but the Treasury said families earning up to $115,000 per year would still see their tax credit increase.
The president also suggested making the American Opportunity Tax Credit permanent. The credit, created in the American Recovery and Reinvestment Act, provides up to $2,500 per year for four years to help students pay for college.
To help people put more money into savings accounts, Obama resurrected last year's proposal to require employers with more than 10 workers to give employees an option to automatically put money into individual retirement accounts. The president would also expand the Saver's Credit to match 50 percent of an individual's contribution up to $500 for those earning up to $65,000. Smaller credits would still be available for people earning up to $85,000.
Small businesses would be given up to $1,000 per year for three years as an incentive to get them to participate in the automatic IRA program, Treasury said.
Fees on Financial Institutions, High-Income Earners
At the other end of the spectrum, the administration made clear in mid-January that it intends to go after big financial institutions to make them pay for the federal government's losses caused by the financial meltdown in the fall of 2008.
Obama proposed that the federal government impose a fee of 0.15 percent on all covered liabilities held by financial institutions with assets of $50 billion or more. The fee would apply to only about 50 banks, insurance companies, broker-dealers, and thrifts but would raise $90 billion over 10 years. The fee would be collected by the Internal Revenue Service and the proceeds would be used to offset the budget deficit.
High-income households will also pay more under the president's proposals. The budget calls for individuals earning more than $200,000 per year ($250,000 for married couples) to face income tax rates of up to 39.6 percent. 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 20 percent in 2011.
The complete text of this article can be found in the BNA Daily Tax Report, February 2, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »
© 2010, The Bureau of National Affairs, Inc.
Obama's Tax Priorities Shift Modestly to Reflect Gloomy Deficit Outlook
By Brett Ferguson and Christine Grimaldi
Publication date: 02/02/2010
The vast majority of President Obama's tax policy priorities were left unchanged in his fiscal year 2011 budget unveiled Feb. 1, but the handful of modifications reflect some of the hard decisions he has to confront with an expected $1.56 trillion budget deficit.
One such change was to abandon his plan for the Making Work Pay tax credit to become permanent, instead opting for a simple one-year extension of the credit to take it through 2011. The one-year extension would cost $61 billion, while making the credit permanent was estimated to cost more than $535 billion over 10 years.
Another was a modification to the Build America Bonds program, which subsidizes interest costs for state and local governments to improve their ability to finance infrastructure projects. The Obama administration is proposing to allow the Build America Bonds to be used to finance a wider range of projects, including the construction of buildings to be used by nonprofit groups, but the subsidy rate would drop to 28 percent from 35 percent—a level that Treasury Department officials said would make the program “revenue neutral” over 10 years.
At the same time, Obama called for most of the same revenue-raising provisions sought in the fiscal 2010 budget and added in a couple of new proposals, such as the repeal of tax code preferences for the coal industry. Another proposal would close a potential “loophole” for paper producers to claim a new $1.01 per gallon cellulosic biofuel producer credit for their use of a pulp byproduct known as “black liquor” to power their plants. Prohibiting the use of the tax credit for black liquor would raise $24 billion and repealing tax breaks for the coal industry would raise $2.3 billion over 10 years.
Uphill Battle on International Proposals
The Obama administration was also dealt a setback with one of its proposed revenue raisers from 2010—a repeal of the “check-the-box” provision that allows some companies to elect to be treated as a separate entity from their owners, opening the possibility they can shift their earnings to low-tax jurisdictions and avoid U.S. income taxes. Repealing that provision would have raised $90 billion over 10 years, but intense opposition to the proposal prompted the administration to drop the idea from the 2011 budget plan.
In its place, the administration proposed tougher tax treatment on transfers of intangible assets such as trademarks or copyrights to offshore entities. Income derived from “excessive” income shifting would be treated as subpart F income, raising an estimated $27.4 billion over 10 years.
Like the fiscal 2010 budget, Obama also called for increased authority to crack down on tax fraud by writing the “economic substance doctrine” into the tax code, increasing penalties, and requiring more information reporting. The administration expects all of its proposed changes to tax administration and enforcement to raise an additional $25 billion in revenues.
In total, the president's 2011 budget features an expectation that the government can raise $1.1 trillion in additional tax revenues through the new policies, nearly triple last year's plan to produce $387.3 billion in new revenues from tax policy changes.
Major Tax Proposals Telegraphed Early
With the health care overhaul bill stalled in Congress, President Obama and Democratic congressional leaders have already shifted priorities to put more emphasis on what lawmakers are doing to help reduce unemployment and provide assistance to middle-class households.
Obama used his Jan. 27 State of the Union address to highlight most of his major plans for tax policy, focusing largely on short-term changes that could help give the economy a boost later in the year.
The president's budget calls for an extension through 2011 of rules that allow small businesses to write off up to $250,000 of qualified investments and for all firms to more quickly depreciate the value of capital investments. The budget also provides for $5 billion in new tax credits for investments in manufacturing facilities producing “clean energy” products. The credit, which pays for 30 percent of investments made in eligible advanced energy projects, was created in February 2009 as part of the American Recovery and Reinvestment Act (Pub. L. No. 111-5), but the $2.3 billion in credits allocated to the program was only sufficient to fund one-third of the applications received.
The budget proposal also repeated the president's plans to eliminate capital gains taxes for investments in small businesses and, like the 2010 budget, calls again to make the research and experimentation tax credit a permanent feature of the tax code.
Initiatives to Aid Middle-Class Taxpayers
Obama expanded on his 2010 proposal to expand refundability of child tax credit by suggesting that the government boost the child care and dependent care tax credit. The idea, part of a broader initiative to aid the middle class, would boost the tax credit rate to 35 percent of qualifying expenses. Current law provides for a credit of up to 20 percent.
Families could claim up to $3,000 in expenses for one child or $6,000 for two children. The maximum credit for a family with two children making $80,000 a year would increase by $900, from $1,200 to $2,100. The increase would begin to phase out on families earning more than $85,000 per year, but the Treasury said families earning up to $115,000 per year would still see their tax credit increase.
The president also suggested making the American Opportunity Tax Credit permanent. The credit, created in the American Recovery and Reinvestment Act, provides up to $2,500 per year for four years to help students pay for college.
To help people put more money into savings accounts, Obama resurrected last year's proposal to require employers with more than 10 workers to give employees an option to automatically put money into individual retirement accounts. The president would also expand the Saver's Credit to match 50 percent of an individual's contribution up to $500 for those earning up to $65,000. Smaller credits would still be available for people earning up to $85,000.
Small businesses would be given up to $1,000 per year for three years as an incentive to get them to participate in the automatic IRA program, Treasury said.
Fees on Financial Institutions, High-Income Earners
At the other end of the spectrum, the administration made clear in mid-January that it intends to go after big financial institutions to make them pay for the federal government's losses caused by the financial meltdown in the fall of 2008.
Obama proposed that the federal government impose a fee of 0.15 percent on all covered liabilities held by financial institutions with assets of $50 billion or more. The fee would apply to only about 50 banks, insurance companies, broker-dealers, and thrifts but would raise $90 billion over 10 years. The fee would be collected by the Internal Revenue Service and the proceeds would be used to offset the budget deficit.
High-income households will also pay more under the president's proposals. The budget calls for individuals earning more than $200,000 per year ($250,000 for married couples) to face income tax rates of up to 39.6 percent. 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 20 percent in 2011.
The complete text of this article can be found in the BNA Daily Tax Report, February 2, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »
© 2010, The Bureau of National Affairs, Inc.
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