Proposed Tax Changes in President Obama’s Fiscal Year 2016 Budget

February 11, 2015

President Obama recently presented his budget proposal for the 2016 fiscal year. The budget proposes $3.99 trillion in spending and $3.53 trillion in revenue for a deficit of $474 billion for 2016 and a number of new tax proposals.

In total, the plan includes $2.4 trillion in proposed tax increases offset by $713 billion in new credits, deductions, and other offsets, for a total tax increase of nearly $1.7 trillion over the next ten years.

The president’s proposal contains tax changes for both individuals and businesses with the tax changes for businesses spread across two categories: budget proposals and revenue for long-run business tax reform.

The difference between the two categories is that the revenue from the business tax reform changes is ostensibly earmarked for revenue neutral tax reform to be completed at a later date. Interestingly, the budget proposal’s revenue tables do not include a reduction in the corporate tax rate to 28 percent—a provision that was included in previous budgets.

The table below includes revenue estimates for both components of the tax plan.

Proposed Tax Increases in President Obama's Fiscal Year 2016 Budget

Budget Proposals and Revenue for Long-Term Tax Reform

     

Proposals

Revenue Change, 2016-2025 (Millions of Dollars)

Budget Proposal

 
 

Total Revenue Increases

$1,851,843

 

Total Revenue Decreases

-$304,276

Net Revenue Change

$1,547,567

     

Revenue for Long-term Tax Reform

 
 

Total Revenue Increases

$550,511

 

Total Revenue Decreases

-$409,046

Net Revenue Change

$141,465

     

Complete Proposal

 
 

Total Revenue Increases

$2,402,354

 

Total Revenue Decreases

-$713,322

Total Revenue Change (Net)

$1,689,032

Source: U.S. Treasury, Tax Foundation Calculations.

 

A couple weeks before the release of the budget, the president provide information on some of the tax changes in his plan. Specifically, he released information on new tax increases on capital gains, a bank tax, and a number of new tax credits. The complete budget includes a number of additional tax changes—some holdovers from previous years’ budgets, such as the Buffett Rule—and many new proposals, such as a 19 percent minimum tax on the foreign earned income of U.S. corporations.

This analysis provides an overview of the proposed tax changes in the president’s fiscal year 2016 budget. The White House has additional details of the president’s proposal here. The ten-year revenue estimates for each provision are in the tables below. Greater detail of the revenue estimate for each provision is available from the Treasury Department.

Tax Changes in the Budget Proposal

As part of his fiscal year 2016 budget, the president proposed a net tax increase of $1.55 trillion with the additional revenue used for infrastructure spending and the growth in other government spending programs.

The president released details for many of his major tax proposals ahead of the State of the Union address in mid-January. Our previous analysis on these proposals is here, here, and here.

Tax Increases

The president proposes $1.85 trillion in tax increases, with many of the tax increases focused on high-income earners.

Increase Capital Gains Tax Rate to 28 Percent and Eliminate Stepped Up Basis

The president’s proposal would increase the top capital gains tax rate from 23.8 percent to 28 percent (37.2 percent in California) and eliminate stepped-up basis—a change would potentially create a 68 percent tax on capital gains upon death. Our analysis finds that the capital gains tax increase alone would shrink the economy by 0.8 percent, eliminate 135,000 jobs and actually lose revenue in the long run. Revenue estimate: $208 billion over ten years.

Implement the Buffet Rule

­The plan would implement the Buffet Rule, or “fair share tax,” a 30 percent minimum tax on high-income earners. Revenue estimate: $35 billion over ten years.

Impose a Bank Tax

The president’s plan would create a 0.07 percent tax on the liabilities of financial firms with assets over $50 billion. The White House estimates the tax would hit around 100 U.S. firms. Additionally, the Tax Policy Center found that the tax would decrease workers’ wages. Revenue estimate: $111 billion over ten years.

Increase Estate Tax Rate to 45 Percent and Reduce Exemption to $3.5 Million

The president proposes we return to the 2009 estate tax rules. This change would increase the estate tax rate from 40 percent to 45 percent and lower the exemption from $5.34 million to $3.5 million. Revenue estimate: $189 billion over ten years.

Places Limits on Retirement Accounts

The president’s plan would create a $3.4 million cap on retirement accounts. This means taxpayers would not be able to save in retirement accounts once they reach this limit. Revenue estimate: $26 billion over ten years.

Conform SECA Taxes for Professional Service Businesses

The president’s proposal would apply self-employment taxes to all business income of active owners of pass-through businesses and introduce new rules to require business owners to classify certain income as wage income instead of passive income. Revenue estimate: $75 billion over ten years.

Increase Tobacco Taxes

The budget includes an increase in the excise tax on tobacco and index the excise tax for inflation. The president would use the money to help pay for preschool and the CHIP program. Revenue estimate: $95 billion.

Limit the Value of Itemized Deductions and Other Tax Expenditures to 28 Percent

This proposal would limit the value of most tax deductions to 28 percent of each dollar of deductible income. A similar proposal appeared in the president’s FY 2015 budget and was previously made by Mitt Romney. Revenue estimate: $603 billion over ten years.

Deemed Repatriation

The budget includes a 14 percent one-time, retroactive tax on foreign corporate income currently invested overseas. The deemed repatriation is an attempt to tax the estimated $2 trillion of foreign earned income reinvested in foreign operations, which defers U.S. taxation. The president proposes to use the revenue to fund new infrastructure projects. Revenue estimate: $268 billion over ten years.  

Tax Cuts

The budget proposal includes $304 billion in new and expanded tax credits to offset the $1.85 trillion tax increase.

Child Care Tax Credit

The president’s proposal would triple the maximum allowable child care tax credit and make it available to families with higher incomes, increasing the value from $1,000 to $3,000 and the income limit to $120,000. Revenue estimate: -$50 billion over ten years.

Consolidate and Expand Higher Education Tax Credit

The president’s plan would eliminate the Hope Credit, Lifetime Learning Credit, and tuition fees, and expand the American Opportunity Credit. The proposal would expand the credit’s refundable portion to $1,500 and make part-time students eligible to claim the credit. Revenue estimate: -$46 billion over ten years.

Small Employer Tax Credit for MyRA

The president’s proposal would offer new tax credits to businesses that offer auto-enrollment in retirement vehicles. The size of the credit would range between $1,500 and $4,500, depending on the size of the business and the business’s current use of retirement plans. Revenue estimate: -$17 billion over ten years.

Expanded EITC for Workers without Children

The president’s budget would increase the EITC for taxpayers without children from $503 to about $1,000. Revenue estimate: -$60 billion over ten years.

Second-Earner Tax Credit

The president’s proposal would create a new maximum $500 tax credit for two-earner families. The credit would phase in to the maximum of $500 at $10,000 of spousal income and phase out beginning at $180,000 for a couple. Revenue estimate: -$89 billion over ten years.

Revenue for Long-Term, Revenue-Neutral Tax Reform

The president proposes $141 billion in new revenue to reserve for long-term tax reform.

In the description of his budget, the president suggests a 28 percent corporate tax rate and a 25 percent corporate tax rate for domestic manufacturers. However, the revenue estimates from the plan do not include any changes to the corporate tax rate and the $141 billion available for tax reform would be enough revenue to cut the corporate tax rate by roughly two-points on a static basis.

The plan includes $550 billion in tax increases offset by $409 billion in new tax credits or expanded business deductions.

Tax Increases

The president’s budget includes a new minimum tax on foreign-earned income, changes to the foreign tax credits, and elimination or repeal of a number of provisions used to account for real business costs for tax increase of $550 billion.

19 Percent Minimum Tax on Foreign Earnings

The president’s proposal would create a worldwide 19 percent minimum tax on foreign-earned income, eliminate the deferral of U.S. tax on foreign-earned income, and reduce the foreign tax credit to 85 percent of the value of foreign taxes paid. Revenue estimate: $205 billion over ten years.

Restrict Deductions for Interest and Limit the Ability of U.S. Firms to Invert

In order to prevent earnings stripping, the president’s proposal would create new rules that limit interest deductions of U.S. companies to foreign subsidiaries. Additionally, the budget proposes new rules to limit corporate tax inversions. Revenue estimate: $77 billion over ten years.

Eliminate Oil, Gas, and Coal Provisions

The president’s budget would eliminate a number of provisions used by oil and gas companies to help account for business costs. Among the provisions eliminated would be expensing of intangible drilling costs, percentage depletion, and an increase in amortization periods. Revenue estimate: $49 billion over ten years.

Repeal LIFO

The president proposes the repeal of last-in, first-out inventory accounting standards, which would equate to a large retroactive tax on inventories. Revenue estimate: $76 billion over ten years.

Tax Cuts

Expand and Permanently Extend Section 179

The president proposes to expand and make permanent Section 179 expensing to allow businesses to expense up to $1 million of investment in equipment in the first year. This would allow businesses to “pay taxes based on an income measure much closer to their bank statement.” Revenue estimate: -$64 billion over ten years.

Enhance and Make Permanent Research Incentives

Among other provisions, the president’s budget would make permanent the Research and Experimentation Tax Credit, the Production Tax Credit, and the Investment Tax Credit. Revenue estimate: -$128 billion over ten years.

Incentives for Renewable Energy

The president’s budget would make permanent tax credits for renewable energy production and energy efficient buildings. Revenue estimate: $43 billion over ten years.

 

Proposed Tax Changes in President Obama's Fiscal Year 2016 Budget

     

 

Proposed Tax Change

Revenue Change, 2016-2025 (Millions of Dollars)

New and Expanded Tax Credits and Deductions

 
 

Expand the Child Care Tax Credit

-$49,872

 

Consolidate and Expand Higher Education Tax Credit

-$45,698

 

MyRA Program with Small Employer Tax Credits

-$17,119

 

Penalty Free Withdrawals for Long-term Unemployed

-$2,458

 

Expand Retirement Plans to Part-time Workers

-$468

 

Simplify Minimum Requirement Distribution Rules

$407

 

Expand EITC for workers without children

-$59,944

 

Simplify rules for claiming EITC for workers without children

-$5,653

 

Provide Second-Earner Tax Credit

-$89,031

 

Extend Exclusion from Income Cancellation for Certain Home Mortgage Debt

-$6,967

Subtotal

-$276,803

     

Tax Increases

 

New Taxes and Tax Rate Increases

 
 

Reduce the Value of Certain Tax Expenditures

$603,226

 

Increase Capital Gains Tax to 28 Percent

$207,884

 

Implement the Buffet Rule/"Fair Share Tax"

$35,176

 

Impose a Bank Tax

$111,814

Subtotal

$958,100

     

Base-Broadening

 
 

Require Inclusion of Income of Accrued Market Discount and Limit Accrual Amount for Distressed Debt

$391

 

Require Average Cost Basis for Covered Securities

$4,375

 

Tax Carried Interest As Ordinary Income

$17,698

 

Require Beneficiaries of Deceased Retirement Plans to Take Distribution over No More than Five Years

$5,479

 

A $3.4 Million Cap on Retirement Account Accrual

$26,043

 

Conform SECA taxes for professional service businesses

$74,551

 

Limit Roth Conversions to Pre-Tax Dollars

$395

 

Eliminate deduction for dividends on stocks of corporations help in ESOPs

$8,622

 

Repeal Exclusion of Net Unrealized Appreciation in Employer Securities

$2,531

 

Disallow Deduction for Charitable Contributions that a required for College Sporting Events Tickets

$2,546

Subtotal

$142,631

     

Estate and Gift Tax Changes

 
 

Reinstate estate, gift and GST tax parameters from 2009

$189,311

 

Require consistency in Value for Transfers and Income Tax Purposes

$3,237

 

Modify transfer tax rules for GRATs and other trusts

$18,354

 

Modify GST Tax Treatment of Health and Education Trusts

-$231

 

Extend lien on Estate Tax Deferrals of Closely Held Businesses

$248

 

Simplify Gift Tax Exclusion for Annual Gifts

$3,446

Subtotal

$214,365

     

Tax Credits and Incentives

 
 

Create "Promise Zones"

-$8,627

 

Tax Credit for Production of Advanced Technology Vehicles

-$2,947

 

Tax Credit for Alternative Fuel Commercial Vehicles

-$371

 

Extend Tax Credit for Contraction of Energy Efficient Homes

-$2,498

 

Reduce Excise Tax on LNG

-$69

 

Enhance and Modify Conservation Easement Deduction

$272

Subtotal

-$14,240

     

Other Tax Increases

 
 

Increase Financing for Oil Spill Liability Trust Fund

$1,628

 

Reinstate Superfund Taxes

$21,243

 

Increase Tobacco Taxes and Index for Inflation

$95,142

 

Make Unemployment Insurance Surtax Permanent

$15,686

 

Expand Federal Unemployment Tax Act base

$44,755

Subtotal

$178,454

     

Tax Gap Reforms

 

Information Reporting

 
 

Improve Information Reporting for Contractors and Businesses

$831

 

Improve Mortgage Interest Deduction Reporting

$1,918

 

Expand Information Reporting

$2,749

     

Business Compliance

 
 

Increase Certainty of Worker Classification

$10,170

 

Increase Information Sharing to Administer Excise Taxes

$147

 

Provide Authority to share information about beneficial ownership of U.S. companies

$34

     

Tax Administration

 
 

Impose Liability on Shareholders to Collect Unpaid Corporate Income Taxes

$5,424

 

Increase levy authority for payments to Medicare provides with delinquent tax debt

$514

 

Implement a program integrity statutory cap adjustment for tax administration

$59,735

 

Streamline Audit Procedures for Large Partnerships

$2,407

 

Revise Offer-in-Compromise Application Rules

$18

 

Make Repeated Failure to File a Felony

$10

 

Facilitate Tax Compliance with Local Jurisdictions

$17

 

Extend Statute of Limitations for Assessment of Overstated Basis and State Adjustments

$856

 

Improve Investigative Disclosure Statute

$10

 

Allow IRS to charge credit and debit card processing fees for certain tax payments

$20

 

Provide IRS with Flexibility to Address Errors

$639

 

Enhance Electronic Filing of Returns

$10

 

Stagger Tax Return Filing Due Dates

$1,630

 

Provide IRS and Treasury with Authority to Regulate All Paid Return Preparers

$427

 

Increase Penalty for Willful or Reckless Conduct by Paid Preparers

$8

Subtotal

$87,574

     

Other Changes and Simplification

 
 

Modify Adoption Credit to Allow Tribal Determination of Special Needs

-$5

 

Repeal Non-Qualified Preferred Stock Designation

$326

 

Reform Excise Tax Based on Investment Income of Private Foundations

-$53

 

Simplify Arbitrage Investment Restrictions

-$344

 

Simplify Single-Family Mortgage Bond Targeting Requirement

-$97

 

Streamline Private Business Limits on Government Bonds

-$81

 

Repeal Technical Terminations of Partnerships

$224

 

Repeal Anti-Churning Rules of Section 197

-$2,822

 

Repeal Telephone Excise Tax

-$2,052

 

Increase Standard Mileage Rate for Automobile Use by Volunteers

-$476

 

Consolidate Limits for Charitable Contributions and Extend Carryforward Periods for Deductions

-$5,990

 

Provide Relief for Certain Accidental Dual Citizens

-$403

Subtotal

-$11,773

     

One-Time International Tax

 
 

Deemed Repatriation

$268,129

     

New Fees

 
 

Reform Inland waterways funding

$1,130

     

Total Revenue Increases

$1,851,843

Total Revenue Decreases

-$304,276

Total Revenue Change

$1,547,567

Source: Office of Management and Budget, U.S. Treasury

 

 

Proposed Revenue for Long-Run Revenue-Neutral Business Tax Reform

President Obama's Fiscal Year 2016 Budget Proposals

     

Proposed Tax Change

Revenue Change, 2016-2025 (Millions of Dollars)

International Reforms

 
 

Restrict deductions for interest of members of financial reporting groups

$64,126

 

Provide tax incentives for location jobs and business activity in the U.S. Eliminate deduction for costs of new hires overseas

-$247

 

Repeal delay in implementation of worldwide interest allocation

-$12,207

 

Extend Active Financing under Subpart F

-$81,333

 

Extend Look-through Treatment

-$9,733

 

Impose 19 percent minimum tax on foreign earnings

$205,976

 

Impose 14 percent one-time tax on deferred foreign income

*

 

Limit shifting of income through intangible property transfers

$3,072

 

Disallow the deduction for excess non-taxed reinsurance premiums paid to affiliates

$7,388

 

Modify tax rules for dual capacity taxpayers

$10,315

 

Tax gain from sale of partnership interest on look-through basis

$2,974

 

Extend section 338(h)(16) to certain asset acquisitions

$672

 

Remove foreign taxes from a section 902 corporation's foreign tax pool when earnings are eliminated

$317

 

Create new category of subpart F income for transactions involving digital goods or services

$8,706

 

Expand foreign base company sales income to include manufacturing service arrangements

$18,375

 

Amend CFC attribution rules

$3,400

 

Eliminate 30-day grace period before subpart F inclusions

$1,195

 

Restrict use of hybrid arrangements that create stateless income

$1,133

 

Limit the application of exceptions under subpart F for transactions that use reverse hybrid to create stateless income

$1,402

 

Limit the ability of domestic entities to expatriate

$12,754

Subtotal

$238,285

     

Simplification and Tax Changes for Small Businesses

 
 

Expand and permanently extend increased expensing for small businesses

-$63,845

 

Expand cash accounting for small businesses and establish uniform definition of small businesses

-$14,757

 

Eliminate capital gains taxations on investment in small business stock

-$9,215

 

Increase limitations for deductible new business expenditures and consolidate provisions for start-up and organizational expenditures

-$4,221

 

Expand and simplify tax credit for small employers for non-elective contributions to employee health insurance

-$1,550

Subtotal

-$93,588

     

Incentives for Manufacturing, Research, and Renewable Energy

 

Enhance and make permanent research incentives

-$127,732

 

Extend and modify certain employment tax credits, including those for veterans

-$10,488

 

Modify and make permanent renewable electricity production credit

-$31,452

 

Modify and permanent extend deduction for energy efficient commercial buildings

-$2,672

 

Carbon dioxide investment and sequestration tax credit

-$5,040

 

Additional tax credits for investment in property used in qualifying advanced energy manufacturing project

-$2,103

 

New Manufacturing Communities Tax Credit

-$4,893

 

Tax credit for second generation biofuel production

-$1,223

Subtotal

-$185,603

     

Regional Incentives

 
 

Modify and extend New Markets Tax Credit

-$10,094

 

Reform and expand Low-Income Housing Tax Credit

-$3,993

Subtotal

-$14,087

     

Incentives for Investment in Infrastructure

 
 

Provide America Fast Forward Bonds (AFFB) and expand eligible uses

-$258

 

Allow current refundings of state and local government bonds

-$46

 

Repeal $150 million non-hospital bond limitation on 501(c)(3) bonds

-$82

 

Increase limit for qualified highway or surface freight transfer facility bonds

-$1,076

 

Provide new category of bonds for "Qualified Public Infrastructure Bonds"

-$4,834

 

Modify qualified private activity bonds for public education facilities

-$3,434

 

Repeal tax-exempt bond financing of professional sports facilities

$542

 

Research arrangements for purposes of private business use limits

-$16

 

Modify tax-exempt bonds for Indian tribal governments

-$112

 

Exempt foreign pension funds from the application of Foreign Investment in Real Property Tax Act

-$2,390

Subtotal

-$11,706

     

Eliminate Oil, Gas, and Coal Provisions

 
 

Repeal enhanced oil recovery credit

$0

 

Repeal credit for oil and natural gas produced from marginal wells

$0

 

Repeal expensing of intangible drilling costs

$15,495

 

Repeal deduction for tertiary injectants

$97

 

Repeal exception to passive loss limitation for working interest in oil and gas properties

$185

 

Repeal percentage depletion for oil and natural gas wells

$13,253

 

Repeal domestic manufacturing deduction for oil and natural gas production

$11,904

 

Increase amortization period for independent producers to seven years

$2,876

 

Repeal expensing of exploration and development costs

$694

 

Repeal percentage depletion for hard mineral fossil fuels

$2,450

 

Repeal capital gains treatment for royalties

$547

 

Repeal domestic manufacturing deduction for coal and other hard minerals

$561

 

Treat publicly-traded partnerships for fossil fuels as C corporations

$1,699

Subtotal

$49,761

     

Revenue Increases on from Financial and Insurance Industry Products

 
 

Require that derivative contracts be marked to market with resulting gain or loss treated as ordinary

$19,796

 

Modify rules that apply to sales of insurance contracts

$502

 

Modify proration rules for life insurance company general and separate accounts

$7,543

 

Expand pro rata interest expense disallowance for corporate owned life-insurance

$6,279

 

Conform net operating loss rules of life insurance companies to those of other corporations

$319

Subtotal

$34,439

     

Other Revenue Increases

 
 

Repeal LIFO accounting for inventories

$76,092

 

Repeal lower-of-cost-or-market inventory accounting

$7,591

 

Modify like-kind exchange rules for real property

$19,542

 

Modify depreciation rules for general aviation passenger aircraft

$3,538

 

Expand definition of built-in loss for partnership loss transfers

$80

 

Extend partnership basis limitation rules to nondeductible expenditures

$1,051

 

Limit the importation of losses under party loss limitation rules

$945

 

Deny deduction for punitive damages

$455

 

Conform corporate ownership standards

$308

 

Tax corporate distributions as dividends

$940

 

Repeal Federal Insurance Contributions Act tip credit

$12,329

 

Repeal excise tax credit for distilled spirits with flavor and wine additives

$1,093

Subtotal

$123,964

     

Total Revenue Increases

$550,511

Total Revenue Decreases

-$409,046

Total Revenue Change (Net)

$141,465

*The revenue from the deemed repatriation is included in Table 1.

Source: U.S. Treasury

 

 

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