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

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 TaxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. 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 TaxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. 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 taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on tobacco and index the excise tax for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . 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 RepatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives.

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 CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.

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