Obama Budget Asks For $1 Trillion In New Revenue

The Obama administration submitted a budget proposal on April 10 that asks for $1 trillion in new revenue and hundreds of tax changes. The overwhelming majority of the proposed tax provisions are recycled from previous proposals, including a number of modifications to the U.S. international tax system, proposals to limit the benefit of deductions to 28%, the Buffett Rule minimum tax, the repeal of the last-in, first-out (LIFO) method of accounting and the repeal of tax benefits for oil, gas and coal producers. The budget also includes several new proposals, including provisions to:

limit retirement plan contributions after accounts exceed certain thresholds, require derivatives to be marked to market with gain or loss treated as ordinary, eliminate the deduction for employee stock ownership plan (ESOP) dividends for orporations with more than $5 million in annual gross receipts, increase tobacco and other excise taxes, impose shareholder liability for certain corporation "intermediary transaction tax shelters," exempt businesses with $10 million or less in annual gross receipts from uniform capitalization (UNICAP) rules, adopt "chained CPI" to provide shallower annual adjustments for tax items pegged to inflation, repeal technical terminations of partnerships, and repeal anti-churning rules of Section 197. The administration's budget proposal is typically released in February but arrived late this year. The House and Senate have already approved competing budget proposals and are not expected to reach a resolution. The administration's budget will not affect the budget process and should instead be viewed as a set of policy goals. It largely represents the president's position in the ongoing debt negotiations. The latest extension of the federal debt limit is set to expire May 19.

The budget generally seeks to raise $1 trillion in new revenue. This figure is consistent with the president's offers of a potential "grand bargain" on the deficit, which would have raised more than $1.5 trillion in new revenue. The American Taxpayer Relief Act (ATRA) enacted in January already raised $620 billion in new revenue toward the president's goal.

Republicans have consistently rejected the administration's call for more revenue and argue that the revenue fight ended when they agreed to the tax increases in ATRA. The budget includes both revenue-raising provisions and tax benefits, but divides them into three distinct groups: baseline adjustments, general budget proposals and proposals to be included as part of revenue-neutral tax reform.

The baseline adjustments would make permanent several individual tax provisions that would otherwise expire after 2017, including the American Opportunity Tax Credit, the increased refundability of the child tax credit and the enhanced earned income tax credit provisions. These changes are estimated to increase the deficit by $100 billion over 10 years. The baseline does not include the extension of "extender" tax provisions scheduled to expire at year-end. The research credit and some other extender provisions are included in the tax reform section, but the administration did not indicate whether it actually supports allowing the other extender provisions to expire.

The budget describes the tax reform proposals as meant for a revenue-neutral tax reform package to be developed by Congress that would eliminate loopholes and subsidies, broaden the base and cut the corporate tax rate. The proposals include both tax cuts and revenue offsets that together would raise an estimated $94 billion over 10 years. This would not allow for more than a single point to be cut from the corporate rate, so Congress is expected to need to make other changes for the tax reform effort to be meaningful. The tax reform package includes many proposals the president has offered before, including provisions that would:

reform the U.S. international tax system, establish a permanent research credit, eliminate fossil fuel preferences, repeal LIFO, and make a series of changes benefiting small business and addressing various perceived loopholes. The budget proposals are described as supporting job creation and investment in infrastructure and reducing the deficit by eliminating tax loopholes and reducing tax benefits for higher-income taxpayers. The net effect of these proposals would raise $1 trillion over 10 years. The lion's share of new revenue would come from controversial provisions to:

provide shallower inflation adjustments through the use of the chained consumer price index (CPI); impose a new Buffett Rule minimum tax of 30% on income exceeding $2 million (phasing in beginning with $1 million in income); and limit the value of deductions and other benefits to 28%. The president has proposed the Buffett Rule and the limit on the value of tax benefits before, but has never proposed using the chained CPI to slow inflation adjustments. The proposal is unpopular with many congressional Democrats because of its effect on entitlement benefits such as Social Security.

The division of the tax provisions into three groups does not appear very meaningful. Administration officials indicated the decision was more presentational than substantive. Provisions that would normally be grouped by common topics - such as the promotion of small business, elimination of tax loopholes and incentives for...

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