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

16 min readBy: Andrew Lundeen

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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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


Revenue Change, 2016-2025 (Millions of Dollars)

Budget Proposal

Total Revenue Increases


Total Revenue Decreases


Net Revenue Change


Revenue for Long-term Tax Reform

Total Revenue Increases


Total Revenue Decreases


Net Revenue Change


Complete Proposal

Total Revenue Increases


Total Revenue Decreases


Total Revenue Change (Net)


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 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


Consolidate and Expand Higher Education Tax Credit


MyRA Program with Small Employer Tax Credits


Penalty Free Withdrawals for Long-term Unemployed


Expand Retirement Plans to Part-time Workers


Simplify Minimum Requirement Distribution Rules


Expand EITC for workers without children


Simplify rules for claiming EITC for workers without children


Provide Second-Earner Tax Credit


Extend Exclusion from Income Cancellation for Certain Home Mortgage Debt




Tax Increases

New Taxes and Tax Rate Increases

Reduce the Value of Certain Tax Expenditures


Increase Capital Gains Tax to 28 Percent


Implement the Buffet Rule/"Fair Share Tax"


Impose a Bank Tax





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


Require Average Cost Basis for Covered Securities


Tax Carried Interest As Ordinary Income


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


A $3.4 Million Cap on Retirement Account Accrual


Conform SECA taxes for professional service businesses


Limit Roth Conversions to Pre-Tax Dollars


Eliminate deduction for dividends on stocks of corporations help in ESOPs


Repeal Exclusion of Net Unrealized Appreciation in Employer Securities


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




Estate and Gift Tax Changes

Reinstate estate, gift and GST tax parameters from 2009


Require consistency in Value for Transfers and Income Tax Purposes


Modify transfer tax rules for GRATs and other trusts


Modify GST Tax Treatment of Health and Education Trusts


Extend lien on Estate Tax Deferrals of Closely Held Businesses


Simplify Gift Tax Exclusion for Annual Gifts




Tax Credits and Incentives

Create "Promise Zones"


Tax Credit for Production of Advanced Technology Vehicles


Tax Credit for Alternative Fuel Commercial Vehicles


Extend Tax Credit for Contraction of Energy Efficient Homes


Reduce Excise Tax on LNG


Enhance and Modify Conservation Easement Deduction




Other Tax Increases

Increase Financing for Oil Spill Liability Trust Fund


Reinstate Superfund Taxes


Increase Tobacco Taxes and Index for Inflation


Make Unemployment Insurance Surtax Permanent


Expand Federal Unemployment Tax Act base




Tax Gap Reforms

Information Reporting

Improve Information Reporting for Contractors and Businesses


Improve Mortgage Interest Deduction Reporting


Expand Information Reporting


Business Compliance

Increase Certainty of Worker Classification


Increase Information Sharing to Administer Excise Taxes


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


Tax Administration

Impose Liability on Shareholders to Collect Unpaid Corporate Income Taxes


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


Implement a program integrity statutory cap adjustment for tax administration


Streamline Audit Procedures for Large Partnerships


Revise Offer-in-Compromise Application Rules


Make Repeated Failure to File a Felony


Facilitate Tax Compliance with Local Jurisdictions


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


Improve Investigative Disclosure Statute


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


Provide IRS with Flexibility to Address Errors


Enhance Electronic Filing of Returns


Stagger Tax Return Filing Due Dates


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


Increase Penalty for Willful or Reckless Conduct by Paid Preparers




Other Changes and Simplification

Modify Adoption Credit to Allow Tribal Determination of Special Needs


Repeal Non-Qualified Preferred Stock Designation


Reform Excise Tax Based on Investment Income of Private Foundations


Simplify Arbitrage Investment Restrictions


Simplify Single-Family Mortgage Bond Targeting Requirement


Streamline Private Business Limits on Government Bonds


Repeal Technical Terminations of Partnerships


Repeal Anti-Churning Rules of Section 197


Repeal Telephone Excise Tax


Increase Standard Mileage Rate for Automobile Use by Volunteers


Consolidate Limits for Charitable Contributions and Extend Carryforward Periods for Deductions


Provide Relief for Certain Accidental Dual Citizens




One-Time International Tax

Deemed Repatriation


New Fees

Reform Inland waterways funding


Total Revenue Increases


Total Revenue Decreases


Total Revenue Change


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


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


Repeal delay in implementation of worldwide interest allocation


Extend Active Financing under Subpart F


Extend Look-through Treatment


Impose 19 percent minimum tax on foreign earnings


Impose 14 percent one-time tax on deferred foreign income


Limit shifting of income through intangible property transfers


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


Modify tax rules for dual capacity taxpayers


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


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


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


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


Expand foreign base company sales income to include manufacturing service arrangements


Amend CFC attribution rules


Eliminate 30-day grace period before subpart F inclusions


Restrict use of hybrid arrangements that create stateless income


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


Limit the ability of domestic entities to expatriate




Simplification and Tax Changes for Small Businesses

Expand and permanently extend increased expensing for small businesses


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


Eliminate capital gains taxations on investment in small business stock


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


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




Incentives for Manufacturing, Research, and Renewable Energy

Enhance and make permanent research incentives


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


Modify and make permanent renewable electricity production credit


Modify and permanent extend deduction for energy efficient commercial buildings


Carbon dioxide investment and sequestration tax credit


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


New Manufacturing Communities Tax Credit


Tax credit for second generation biofuel production




Regional Incentives

Modify and extend New Markets Tax Credit


Reform and expand Low-Income Housing Tax Credit




Incentives for Investment in Infrastructure

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


Allow current refundings of state and local government bonds


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


Increase limit for qualified highway or surface freight transfer facility bonds


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


Modify qualified private activity bonds for public education facilities


Repeal tax-exempt bond financing of professional sports facilities


Research arrangements for purposes of private business use limits


Modify tax-exempt bonds for Indian tribal governments


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




Eliminate Oil, Gas, and Coal Provisions

Repeal enhanced oil recovery credit


Repeal credit for oil and natural gas produced from marginal wells


Repeal expensing of intangible drilling costs


Repeal deduction for tertiary injectants


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


Repeal percentage depletion for oil and natural gas wells


Repeal domestic manufacturing deduction for oil and natural gas production


Increase amortization period for independent producers to seven years


Repeal expensing of exploration and development costs


Repeal percentage depletion for hard mineral fossil fuels


Repeal capital gains treatment for royalties


Repeal domestic manufacturing deduction for coal and other hard minerals


Treat publicly-traded partnerships for fossil fuels as C corporations




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


Modify rules that apply to sales of insurance contracts


Modify proration rules for life insurance company general and separate accounts


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


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




Other Revenue Increases

Repeal LIFO accounting for inventories


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


Modify like-kind exchange rules for real property


Modify depreciation rules for general aviation passenger aircraft


Expand definition of built-in loss for partnership loss transfers


Extend partnership basis limitation rules to nondeductible expenditures


Limit the importation of losses under party loss limitation rules


Deny deduction for punitive damages


Conform corporate ownership standards


Tax corporate distributions as dividends


Repeal Federal Insurance Contributions Act tip credit


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




Total Revenue Increases


Total Revenue Decreases


Total Revenue Change (Net)


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

Source: U.S. Treasury