Proposed Tax Changes in President Obama’s Fiscal Year 2016 Budget February 11, 2015 Andrew Lundeen 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 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 Stay informed on the tax policies impacting you. Subscribe to get insights from our trusted experts delivered straight to your inbox. Subscribe Share Tweet Share Email Topics Center for Federal Tax Policy Business Taxes Corporate Income Taxes Estate, Inheritance and Gift Taxes Individual Capital Gains and Dividends Taxes Individual Income and Payroll Taxes International Taxes Tags Millionaires and High Income Earners
