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 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. 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 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. 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 bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. 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 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 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 taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. 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 TaxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.
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 expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. 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 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. 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 taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the 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.
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Revenue Estimates for Tax Changes in President Obama's Fiscal Year 2015 Budget |
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Source: OMB Summary Tables of 2015 Budget |
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Tax Change |
Revenue Increase/Decrease in Millions |
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Opportunity, Growth, and Security Initiative |
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Limits to Total Accrual of Tax Preferred Retirement Accounts |
$28,377 |
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Surface Transportation Reauthorization |
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Transition to Reformed Business Tax System (Deemed Repatriation) |
$150,000 |
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Early Childhood Investments |
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Increased Tobacco Taxes and Index for Inflation |
$78,217 |
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Earned Income Tax Credit Expansion |
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Expanded EITC |
-$59,740 |
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Tax Expenditure Changes for High Income |
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Taxes Carried Interest as Ordinary Income |
$13,797 |
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Conform SECA Taxes for Professional Service Businesses |
$37,679 |
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Impose Liability on Shareholders to Collect Corporations Unpaid Income Taxes |
$5,238 |
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Cost Basis of Stock Covered by Security must be determined with Average Cost Basis Method |
$3,515 |
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Tax Provisions for Clean Energy and Manufacturing |
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Provide Additional Tax Credits for Investment in Qualified Property Used in a Qualifying Advanced Energy Manufacturing Project |
-$1,896 |
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Designate Promise Zones |
-$5,876 |
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New Manufacturing Communities Tax Credit |
-$4,664 |
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Tax Credit for the Production of Advanced Technology Vehicles |
-$4,825 |
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Tax Credit for Medium and Heavy Duty Alternative-Fuel Commercial Vehicles |
-$401 |
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Modify Tax Exempt Bonds for Tribal Governments |
-$112 |
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Extend Tax Credit for Cellulosic Biofuel |
-$1,698 |
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Modify and Extend Tax Credit for Construction of Energy Efficient New Homes |
-$2,048 |
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Reduce Excise Tax on LNG to Bring into Parity with Diesal |
-$20 |
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Tax Cuts for Individuals |
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Automatic Enrollment in IRAs, including a Small Employer Tax Credit and Double the Tax Credit for Small Employer Start-up Costs |
-$14,507 |
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Expand Child and Dependent Care Tax Credit |
-$9,610 |
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Extend Exclusion from Income for Cancellation of Certain Home Mortgage Debt |
-$7,665 |
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Exlusion from Income for Student Loan Forgiveness for students in Certain Income Repayment Programs who have Completed Payments |
-$5 |
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Exclusion for Student Loan Forgiveness for Certain Scholarship amoutns for Participants in HIS programs |
-$165 |
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Make Pell Grants Excludable from Income |
-$8,863 |
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Tax Increase for Upper Income Earners |
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Reduce Value of Certain Tax Expenditures for Upper Income Earners |
$598,066 |
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Implement Buffet Rule through new "Fair Share Tax" |
$53,026 |
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Changes to Estate and Gift Tax Provisions |
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Revert to 2009 Parameter for Estate and Gift Tax and Additional Changes |
$131,057 |
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Reform Treatment of Financial Industry |
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"Financial Crisis Reponsibility Fee" and Other Financial Reforms |
$56,374 |
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Other Revenue Raisers and Tax Expenditure Changes |
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Require Non-Spouse Beneficiaries of Deceased IRA Owners to Take Inherited Distributions over No More than Five Years |
$5,159 |
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Increase Oil Spill Liability Trust Fund |
$951 |
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Reinstate Superfund Taxes |
$23,270 |
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Make Unemployment Insurance Surtax Permanent |
$15,200 |
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Enhance and Modify Conservation Easement Deduction |
$522 |
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Eliminate Deduction for Dividends Help in Certain ESOPs |
$7,883 |
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Tax Comliance Reforms |
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Tax Gap and Compliance Reforms |
$17,078 |
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Changes to Complexity of Code |
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Including Simplification of Rule for Claiming EITC for Workers without Qualifying Children and Repeal of Telephone Excise Tax |
-$11,129 |
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Provisions Pertaining to Manufacturing, Research, Clean Energy, and Insourcing |
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Tax Incentive for Locating Jobs and Business Activity in U.S. |
-$212 |
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Enhance and Make Permanent the R and E Tax Credit |
-$108,146 |
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Extend and Modify Certain Employment Credits |
-$9,714 |
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Modify and Make Permanent Renewable Electricity Production Tax Credit |
-$19,286 |
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Modify and Make Permanent the Deduction for Energy-Efficient Commercial Building Property |
-$6,068 |
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Tax Changes for Small Businesses |
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Extend Increased Expensing for Small Business |
-$56,828 |
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Eliminate Capital Gains Taxation on Investments in Small Business Stock |
-$9,202 |
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Increased Limitation for Deductible New Business Expenditures and Consolidates Provisions for Start-Ups |
-$4,258 |
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Expand and Simplify Credits Provided to Qualified Small Employers for Non-Elective Contributions to Employee Health Insurance |
-$1,326 |
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Incentives to Promote Regional Growth |
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Permanently Extend and Modify the New Markets Tax Credit |
-$8,713 |
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Reform and Expand the Low-Income Housing Tax Credit |
-$1,390 |
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International Tax Provisions |
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Changes to International Tax Provisions |
$276,305 |
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Elimination of Oil and Gas Provisions |
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Elimination of Oil and Natural Gas Tax Provisions Including Elimination of Intagible Drilling Costs and Percentage Depletion |
$44,838 |
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Elimination of Coal Provisions Including Repeal of Expensing of Exploration and Development Costs |
$3,965 |
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Additional Revenue Raisers Dealing with Accounting and Miscellaneous Provisions |
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Repeal of LIFO |
$82,708 |
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Modification of Like-Kind Exhanges for Real Property (1031 Exchange) |
$18,270 |
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Other Revenue Changes Inclusing Modification of Depreciation Rules for Business Aircrafts and Changes in Other Acounting Method |
$18,148 |
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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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