The Tax Changes in President Obama’s Fiscal Year 2015 Budget

March 05, 2014

President Obama released his fiscal year 2015 budget yesterday. Overall, the president proposes to increase revenue by $1.759 trillion over ten years. This new revenue comes in the form of a couple large tax changes, numerous small tax changes, and new fees (which we don’t discuss in this post).

This analysis is a general overview and is based on the few specifics that the White House’s budget documents provide.

Major Changes for Individual Taxpayers

The President’s fiscal year 2015 budget introduces and expands a number of programs. He proposes to expand the child tax credit and the EITC, two of the largest family tax benefits. His budget also proposes to alter retirement plans and create an auto-enrollment IRA program. In order to pay for these expansions, his budget will raise taxes on high-income earners through a series of changes to tax expenditures, most notably placing a cap on the value of itemized deductions.

Expansion of the Earned Income Tax Credit and Child Tax Credit

The Earned Income Tax Credit and the Child Tax Credit are refundable tax credits aimed at working families. The size of these credits depends on income, marital status, and number of children.

Obama’s proposal would double the current EITC for childless working taxpayers from $496 to $1,000 and make the credit available for taxpayers who earn $7.50 an hour and work 40 hours a week (approximately $15,600). The proposal would also reduce the minimum age a taxpayer is eligible to receive this credit from 25 years to 21 years.

This proposal will cost approximately $60 billion over ten years according to the budget documents.

The additional cost would be offset by revenue from a series of tax increases such as taxing carried interest as ordinary income ($13.79 billion in new revenue), making S-corporation liable for self-employment taxes ($37.67 billion), imposing taxes on shareholders that enter into “Intermediary Transaction Tax Shelters” ($5.23 billion), and changing the rules for determining the cost basis of certain portfolio stock ($3.51 billion).

The Child Tax Credit will also be expanded (no details on how this expansion will affect taxpayers). The expansion will cost an additional $9.6 billion over ten years.

Auto Enroll IRAs and a Cap on Retirement Accounts        

Auto enroll IRAs make a return appearance in the budget. This proposal would require businesses with more than ten employees to automatically enroll workers in an individual retirement account (IRA). Employees would be able to opt-out if they choose. Businesses would receive tax credits to offset the cost of setting up these programs. This would cost approximately $14.5 billion over ten years.

In addition, the budget will place a cap on retirement accounts in order to raise $28 billion for what is called the “Opportunity, Growth, and Security Initiative.”

New Taxes on High Income Earners

Obama’s budget reintroduces several tax proposals that aim to raise more tax revenue from high-income earners. This is where the budget gets most of its revenue.

  • Obama’s budget will limit the value of itemized deductions for high-income taxpayers, raising approximately $600 billion in new revenue. This change will only allow taxpayers to take itemized deductions against a 28 percent income tax rate, rather than in the tax bracket they actually fall. This reduces the value of itemized deductions and boosts taxes paid by high income taxpayers.
  • The Buffet Rule, or the “Fair Share Tax,” is a 30 percent minimum tax on high-income earners. It would raise only about $53.02 billion over ten years.
  • Increases the Estate Tax rate from 40 percent to 45 percent and lowers the exclusion, raising about $131 billion over ten years.

Major Changes for Businesses

Overall President Obama’s budget would raise taxes on businesses through the elimination of tax expenditures, changes to accounting rules, and altering provisions in the international tax system. Small businesses receive some treatment to lessen the double taxation in the tax code, but S corporations may now face higher taxes.

Possible Future Rate Change

The budget promises that a portion of the proposed tax increases on business will be used to pay for a future cut in the corporate rate to 28 percent and 25 percent for manufacturing. Future rate cuts for small businesses are mentioned as well, but the budget does not mention details.

Improves Capital Treatment for Small Businesses, But Subjects S Corps to Payroll Tax

The Obama budget made some changes to the treatment of small businesses. The budget proposes to extend increased expensing for small business. This is often known as section 179 deduction, which allows a business to fully expense capital costs up to a certain dollar amount. At the end of 2013, the section 179 allowable amount reverted back to $25,000 of capital investments, down from $500,000. Correct treatment would allow the full expensing of all capital investments.

Additionally, the budget proposes the elimination of capital gains taxation on investments in small business stock. Both these moves would help mitigate the bias against saving and investment present in the current tax code. These types of changes should not be limited to small businesses only.

On the flip side, the proposal would subject S corporations to the self-employment tax. As detailed above, this is one of the taxes used to pay for the EITC expansion.

New Revenues from Changes to the International Tax System

The international provisions in the Obama budget result in numerous tax increases on U.S. businesses that operate on an international basis. One of the largest changes would be to determine the foreign tax credit on a pooled basis. This would result in a tax increase of $74.7 billion over ten years for businesses that take the foreign tax credit.

Additionally the budget calls for a deemed repatriation of the foreign earnings currently held abroad. The administration estimates a one-time revenue gain of $150 billion from a retroactive tax on the $1-2 trillion worth of profits currently held or reinvested overseas.  

New Tax on Banks

Like Chairman Dave Camp’s (R-MI) tax reform plan, the Obama budget comes with a bank tax, or a “financial crisis responsibility fee.” This tax would be imposed on bank liabilities, as opposed to bank assets as seen in the Camp proposal, and would raise $56 billion in revenue over the budget window.

Repeal of LIFO

As in Camp’s and Baucus’s plans, the Obama budget proposes to repeal last-in, first-out (LIFO) accounting rules. It is unclear whether or not the Obama budget would institute this tax retroactively as in the Camp and Baucus proposals.

Research and Experimentation Tax Credit

The Obama budget would enhance and make permanent the R and E tax credit, increasing its size by $108 billion over ten years.

Energy Tax Provisions

Green Energy

The president’s budget makes permanent multiple tax provisions for green energy, including:

  • Tax credit for renewable electricity production
  • Deduction for energy efficient commercial building property
  • Modify and extend tax credit for construction of energy efficient new homes
  • Tax credit for the production of advanced technology vehicles
  • Tax credit for medium and heavy duty alternative-fuel commercial vehicles
  • Additional tax credits for investment in qualified property used in a qualifying advanced energy manufacturing project
  • Tax credit for cellulosic biofuel

Oil, Coal, and Natural Gas

The president’s budget eliminates multiple provisions pertaining to the treatment of oil, coal, and natural gas. The eliminated provisions for oil and natural gas include:

  • Expensing of intangible drilling costs
  • Percentage depletion for oil and natural gas wells
  • Domestic manufacturing deduction for oil and gas (Section 199)
  • Increase in amortization period for independent producers to seven years
  • Dual Capacity (International Tax Provision)

The eliminated provisions for coal include:

  • Expensing of exploration and development costs
  • Percentage depletion for hard mineral fossil fuels
  • Capital gains treatment for royalties
  • Domestic manufacturing deduction for coal and other hard mineral fossil fuels (Section 199)

Revenue Estimates of Tax Changes Included in the President’s Budget

We’ve included below a table of the revenue estimates of the tax changes in President Obama’s budget. The budget includes net revenue increases of $1.759 trillion over the next ten years, which includes tax increases of over $1.3 trillion (as outlined below). This table does not include the revenue the budget raises from new fees, such as the mandatory surcharge for air traffic services or revenues gained from new compliance rules.

Some of the largest tax increases are $598 billion from the limitation of itemized deductions for high earners, $131 billion from changes to the estate and gift tax, $276 billion from the changes to the international tax system, $56 billion for a new tax on banks, and $53 billion from the new “Fair Share Tax” inspired by the famous Buffet Rule.

See below for the list of tax changes (both increases and decreases). For reference, the information is presented in the same order as the summary tables. Please let us know if we forgot any changes.

Revenue Estimates for Tax Changes in President Obama's Fiscal Year 2015 Budget

Source: OMB Summary Tables of 2015 Budget

Tax Change

Revenue Increase/Decrease in Millions

Opportunity, Growth, and Security Initiative

 

 

Limits to Total Accrual of Tax Preferred Retirement Accounts

$28,377

Surface Transportation Reauthorization

 

 

Transition to Reformed Business Tax System (Deemed Repatriation)

$150,000

Early Childhood Investments

 

 

Increased Tobacco Taxes and Index for Inflation

$78,217

Earned Income Tax Credit Expansion

 

 

Expanded EITC

-$59,740

Tax Expenditure Changes for High Income

 

 

Taxes Carried Interest as Ordinary Income

$13,797

 

Conform SECA Taxes for Professional Service Businesses

$37,679

 

Impose Liability on Shareholders to Collect Corporations Unpaid Income Taxes

$5,238

 

Cost Basis of Stock Covered by Security must be determined with Average Cost Basis Method

$3,515

Tax Provisions for Clean Energy and Manufacturing

 

 

Provide Additional Tax Credits for Investment in Qualified Property Used in a Qualifying Advanced Energy Manufacturing Project

-$1,896

 

Designate Promise Zones

-$5,876

 

New Manufacturing Communities Tax Credit

-$4,664

 

Tax Credit for the Production of Advanced Technology Vehicles

-$4,825

 

Tax Credit for Medium and Heavy Duty Alternative-Fuel Commercial Vehicles

-$401

 

Modify Tax Exempt Bonds for Tribal Governments

-$112

 

Extend Tax Credit for Cellulosic Biofuel

-$1,698

 

Modify and Extend Tax Credit for Construction of Energy Efficient New Homes

-$2,048

 

Reduce Excise Tax on LNG to Bring into Parity with Diesal

-$20

Tax Cuts for Individuals

 

 

Automatic Enrollment in IRAs, including a Small Employer Tax Credit and Double the Tax Credit for Small Employer Start-up Costs

-$14,507

 

Expand Child and Dependent Care Tax Credit

-$9,610

 

Extend Exclusion from Income for Cancellation of Certain Home Mortgage Debt

-$7,665

 

Exlusion from Income for Student Loan Forgiveness for students in Certain Income Repayment Programs who have Completed Payments

-$5

 

Exclusion for Student Loan Forgiveness for Certain Scholarship amoutns for Participants in HIS programs

-$165

 

Make Pell Grants Excludable from Income

-$8,863

Tax Increase for Upper Income Earners

 

 

Reduce Value of Certain Tax Expenditures for Upper Income Earners

$598,066

 

Implement Buffet Rule through new "Fair Share Tax"

$53,026

Changes to Estate and Gift Tax Provisions

 

 

Revert to 2009 Parameter for Estate and Gift Tax and Additional Changes

$131,057

Reform Treatment of Financial Industry

 

 

"Financial Crisis Reponsibility Fee" and Other Financial Reforms

$56,374

Other Revenue Raisers and Tax Expenditure Changes

 

 

Require Non-Spouse Beneficiaries of Deceased IRA Owners to Take Inherited Distributions over No More than Five Years

$5,159

 

Increase Oil Spill Liability Trust Fund

$951

 

Reinstate Superfund Taxes

$23,270

 

Make Unemployment Insurance Surtax Permanent

$15,200

 

Enhance and Modify Conservation Easement Deduction

$522

 

Eliminate Deduction for Dividends Help in Certain ESOPs

$7,883

Tax Comliance Reforms

 

 

Tax Gap and Compliance Reforms

$17,078

Changes to Complexity of Code

 

 

Including Simplification of Rule for Claiming EITC for Workers without Qualifying Children and Repeal of Telephone Excise Tax

-$11,129

Provisions Pertaining to Manufacturing, Research, Clean Energy, and Insourcing

 

 

Tax Incentive for Locating Jobs and Business Activity in U.S.

-$212

 

Enhance and Make Permanent the R and E Tax Credit

-$108,146

 

Extend and Modify Certain Employment Credits

-$9,714

 

Modify and Make Permanent Renewable Electricity Production Tax Credit

-$19,286

 

Modify and Make Permanent the Deduction for Energy-Efficient Commercial Building Property

-$6,068

Tax Changes for Small Businesses

 

 

Extend Increased Expensing for Small Business

-$56,828

 

Eliminate Capital Gains Taxation on Investments in Small Business Stock

-$9,202

 

Increased Limitation for Deductible New Business Expenditures and Consolidates Provisions for Start-Ups

-$4,258

 

Expand and Simplify Credits Provided to Qualified Small Employers for Non-Elective Contributions to Employee Health Insurance

-$1,326

Incentives to Promote Regional Growth

 

 

Permanently Extend and Modify the New Markets Tax Credit

-$8,713

 

Reform and Expand the Low-Income Housing Tax Credit

-$1,390

International Tax Provisions

 

 

Changes to International Tax Provisions

$276,305

Elimination of Oil and Gas Provisions

 

 

Elimination of Oil and Natural Gas Tax Provisions Including Elimination of Intagible Drilling Costs and Percentage Depletion

$44,838

 

Elimination of Coal Provisions Including Repeal of Expensing of Exploration and Development Costs

$3,965

Additional Revenue Raisers Dealing with Accounting and Miscellaneous Provisions

 

 

Repeal of LIFO

$82,708

 

Modification of Like-Kind Exhanges for Real Property (1031 Exchange)

$18,270

 

Other Revenue Changes Inclusing Modification of Depreciation Rules for Business Aircrafts and Changes in Other Acounting Method

$18,148

Total

$1,311,276

Update: We have made a change to more accurately reflected the effect of the cap on itemized deductions on high-income taxpayers in the "Major Changes for Individual Taxpayers" section.

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