|
What He Promised: Obama’s Tax Proposals and Prospects in Congress
During his campaign President-elect Barack Obama proposed tax cuts and incentives intended to narrow income inequality, promote alternative energy, and subsidize health insurance. He made additional proposals late in the campaign to address the country’s deteriorating fiscal situation. This article reviews Obama’s proposals and takes a snapshot of prospects for congressional action.
Since candidate Obama issued his proposals, the economy has slipped further and the government has authorized massive federal expenditures to attempt to rescue distressed businesses. Obama has proposed tax cuts costing more than $3 trillion over 10 years. The deficit reached $450 billion in fiscal 2008 and may exceed $750 billion in the current fiscal year—before the newly elected Democratic White House and Congress consider additional spending. Observers expect the unified Democratic leadership to enact additional stimulus measures that will increase this deficit.
The president’s budget proposal traditionally is released the first week in February. In transition years, the new president typically takes additional weeks to put his stamp on it. But the current year, fiscal 2009, is funded only through March 6, because Democratic congressional leaders decided not to negotiate a full-year plan with the Bush administration. The new administration and Congress would have a huge “to-do” list even without the shifting challenges of an economy in retreat and an unprecedented global financial meltdown.
Economic Stimulus
At a news conference today, Obama said that if a stimulus bill were not enacted before his inauguration, it would be his first priority. It would include an extension of unemployment benefits and aid to state and local governments, among other items.
During the campaign, Obama proposed several short-term tax reductions from the stump, without detail:
- Allow all taxpayers penalty-free withdrawal of up to 15% from IRAs and 401k plans, maximum $10,000
- Allow a refundable $3,000 tax credit to companies for each new job they create in the United States
- Suspend taxes on unemployment insurance benefits for 2008 and 2009
House Democrats have begun working on a new stimulus bill for possible consideration during a lame-duck session to begin November 17. The $100 billion package could include money for public works projects, a 13-week extension of unemployment benefits, funds for food stamps, and aid to state and local governments. Enactment of a stimulus package during the lame-duck session would depend on White House agreement, as well as that of the still narrowly divided Senate.
The policy debate is focused in large part on whether these initiatives would provide a sufficient short term economic stimulus. The White House has offered no details of what stimulus it would support.
|
Tax Proposals Affecting Individuals
Obama (like John McCain) framed most of his tax proposals for individuals in the context of the provisions enacted in President Bush’s first term. The basis of his plan is to restore much of the tax structure in effect under President Clinton and add reductions benefiting families of modest income. Without congressional action, the law will revert to Clinton-era provisions in 2011.
- Individual rates and credits
- Restore 36 and 39.6% statutory income tax rates
- Restore personal exemption phase-out and itemized deduction limitation for incomes of $200,000/$250,000 (singles/couples)
- Extend permanently current-law child credit
- Extend permanently current-law marriage penalty relief (standard deduction increase)
- Maintain other income tax rates (10% / 15% / 25% / 28%)
- Individual alternative minimum tax (AMT)—index for inflation. The interaction of the 2001/2003 tax cuts with the AMT results in more taxpayers falling subject to the AMT. Because of the growing cost of AMT indexing, it is conceivable that policymakers might structure tax liabilities in such a way as to reduce the interaction while maintaining focus on the income groups that were that target of Obama’s proposals. This could be accomplished by allowing the tax cuts applicable to high income taxpayers to expire.
- Capital gains/dividends
- Extend permanently 0% / 15% tax rates on capital gains and qualified dividends for taxpayers with AGI less than $200,000/$250,000 (singles/couples)
- Impose 20% rate on gains/dividends for taxpayers above those thresholds President Clinton accepted a capital gains differential in 1997
- Eliminate capital gains for certain investments in a small business or start-up business. Similar proposals have long circulated in Congress.
- Estate tax: set exemption at $3.5 million and rate at 45%. Under current law, the unified credit reverts to $1 million and the rate to 55% in 2011. The proposal would maintain the 2009 exemption and rate.
Obama also proposed a variety of credits aimed at the middle class, including millions of taxpayers for whom the credits would have to be refundable for them to take full advantage.
Health Care
About 50 million Americans had no health insurance before the recession began. Obama has ranked reform among his top four priorities—right behind energy. Because of jurisdictional lines, particularly in the House, it would be challenging to push health care and energy initiatives simultaneously. Both issues go primarily through the House Ways and Means and Energy and Commerce committees. The Senate Finance Committee shares jurisdiction with other committees for both issues.
Obama has outlined health-insurance reforms. Congressional Democrats and outside groups also have ideas. It’s unclear how they will be blended. Obama’s proposals:
- Provide subsidies tied to income levels for health insurance purchased through new health insurance exchange
- Institute “pay or play” for employers, who would either have to "play" by making an "meaningful contribution" to the cost of employees’ health coverage or "pay" a percentage of payroll toward the cost of a national plan
- Create small-business tax credit of 50% of employer-paid premiums
|
Business Credits
- Extend permanently the research credit. The credit is extended through 2009 under current law.
- Extend permanently the renewable energy production credits. In September Congress expanded and extended the credits in various ways, but the new president may offer additional changes as part of his energy agenda.
Revenue Proposals
The Obama revenue raising proposals mostly are based on provisions that have previously circulated in Congress, and the campaign offered few details.
- Tighten corporate tax deductibility of CEO pay. The Obama campaign offered no details of the proposal. The Emergency Economic Stabilization Act, enacted in October, further limited the deductibility of executive compensation for its participants. That could be a model for a wider proposal if the Obama White House were to pursue it.
- Tax carried interests as ordinary income. The provision was included in H.R. 6275, a bill that would have indexed the AMT exemption.
- Tax publicly traded financial partnerships as C corporations
- Oil and gas
- Eliminate oil and gas loopholes
- Impose windfall profits tax on oil and gas companies
Obama has not specified which oil and gas provisions he would target to help pay for green energy incentives, but he has been specific about a windfall profits tax. Since then, however, the price of oil has declined by 60%.
- Codify the economic substance doctrine
- Reallocate multinational expenses and taxes on basis of repatriation of foreign income. Raising $106 billion over 10 years under a year-old estimate, the proposal was include in the tax reform bill introduced by Chairman Rangel in October 2007 Current law allows U.S. corporations to defer active business income that is earned through controlled foreign corporations. However, these corporations may take currently the deductions associated with the income. The timing, according to Rangel, encourages U.S. corporations to shift jobs abroad and to finance overseas activities with the deductions. Under the proposal, U.S. corporations that defer income through controlled foreign corporations would also defer the deductions, and recognize them when they repatriate the deferred income.
- Create an international tax-haven watch list of countries that do not share information the United States; require greater financial disclosure to decrease tax shelters. The degree of disclosure has not been specified.
In Congress
No matter what happens in the lame-duck session, in the first months of the new administration, Congress may consider a stimulus bill, write a spending bill to cover the rest of fiscal 2009, and develop the first budget under President Obama. Since 1982, Congress has regularly used the revenue reconciliation process to pass budget-related bills, including changes in tax law. Legislation considered under the reconciliation process cannot be filibustered in the Senate. A simple majority is needed for passage. If 2009 follows this pattern, Congress would pass tax legislation, using reconciliation, by the August recess.
The key question is what tax initiatives will be included in 2009 in a reconciliation package (or another vehicle that subject to filibuster). One thing is clear: predicting outcomes in Congress several months off is dangerous business.
With that caveat in mind, Congress will likely address both the estate tax and AMT relief in 2009, as well as dozens of provisions that will expire at the end of 2009. The estate tax is scheduled to be repealed at the end of 2009 and then be reinstated at 2001 levels in 2011. AMT relief enacted this year is for 2008 only.
It is unclear what other tax measures would be included. High on the list would be additional economic stimulus such as tax rebates, direct tax reductions through withholding, and Obama’s individual income tax initiatives. Business tax relief (and perhaps the revenue raising provisions that have been proposed to offset the cost of business tax relief) is more likely to be addressed later.
The expansion of Democratic majorities in the House and Senate enhances the new president’s prospects for getting his priorities enacted. Even if Senate Democrats fall short of a filibuster-proof majority of 60 members, they are expected to having a working majority that will allow them to legislate in many areas that are not accorded reconciliation protection. The latest count gives Democrats 57 senators (including two independents) and Republicans 40, with three GOP-held seats to be determined.
In 2007-2008, the Senate Finance Committee operated with the narrowest margin—11 Democrats, 10 Republicans. The Senate traditionally has had committee ratios that reflect the body. Democrats likely will have an 11-9 or 12-9 split on Finance. Two committee Republicans were defeated for reelection, which may result in the naming of a new junior Republican. The committee’s Democratic slate was unaffected by the elections.
House Democrats expanded their majority by 18 members, to 254 to 173 Republicans, with eight races outstanding. The House majority traditionally is over-represented on committees. The GOP membership on Ways and Means was altered by retirements and election defeats: eight of its 17 will not return. Three of 24 Democrats will not return: one retired, one died (Stephanie Tubbs Jones), and one, Rahm Emanuel, is the new White House chief of staff. Democrats may increase their ratio on the committee.
|
For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or
rspeizma@kpmg.com
|
