President Obama’s 2016 budget request has been characterized as primarily an attempt to appeal to middle-class voters in anticipation of the upcoming 2016 elections. As such, many Republican leaders in Congress have given it the usual label when different parties control the White House and Congress: “dead on arrival.” Yet a number of the tax proposals bear a striking similarity to tax proposals that Republicans have also made. As such, while overall the budget may be dead on arrival, there are pieces in the budget that may form key elements of negotiations between Congress and the White House on tax legislation for 2015.
POSSIBLE BIPARTISAN AREAS
Even where the proposals from the president and Republicans appear similar, there may be substantial areas of disagreement. For example, where both agree on a particular tax break, they may disagree on how to pay for it. Or take the taxation of overseas profits of U.S. multinational companies, where they may both agree on some form of taxing those profits, but disagree on the use of the revenue from that change.
- Extenders. The budget proposes to make several of the regularly expiring provisions permanent: the research credit, enhanced Code Sec. 179 expensing, the 100 percent exclusion for gain on the sale of qualified small-business stock, the Work Opportunity Tax Credit, the alternative energy production tax credit, the Indian employment credit, and the new markets tax credit. Republicans have made similar proposals. The House last year proposed making several business extenders permanent and has revived the same effort this year. Last year, the president objected to addressing business extenders without also addressing individual extenders, and the compromise was an extension of almost all of the extenders through 2014 only. In the context of a larger tax package, making some of these expiring provisions permanent could easily be part of the deal.
- Taxing foreign earnings. The budget proposes to immediately tax accumulated untaxed foreign earnings held overseas at a 14 percent rate and to tax such foreign earnings in the future at a 19 percent rate, subject to a partial offset by foreign taxes paid. The Republicans have suggested proposals to try to bring those foreign earnings home for use in investment, but mostly through voluntary programs of tax reduction to entice U.S. multinationals to repatriate the earnings. Republicans also are of the view that any taxes raised from the effort should contribute to corporate rate reduction, while the president would use some of the money to support middle-class tax breaks. Still, any revenue-raiser that has come from both parties is likely to be a factor in any proposals this year.
- Taxing financial institutions. The budget proposes a tax on liabilities of large financial institutions to discourage those financial institutions from taking on excess debt. Last year, both the president and Republican Ways and Means Chairman Dave Camp proposed some version of such a tax to help raise funds for infrastructure improvements. The budget no longer ties the tax directly to infrastructure improvements, but again any revenue-raiser that has come from both sides is likely to be considered in a tax bill this year.
- Education reform. The budget proposes an enhanced American Opportunity Tax Credit, expanding availability to a fifth year of education and to part-time students, and expanding the refundable feature. The budget also calls for eliminating the Lifetime Learning Credit, the above-the-line deduction for tuition and fees, the student loan interest deduction and Coverdell Education Savings Accounts. Republicans have made similar proposals to simplify the education area, with the debate likely to be over the particular details and how to pay for it.
- Retirement reform. The budget proposes to increase access to employer-sponsored plans and to encourage automatic IRA enrollment, with a tax credit for small businesses that set up automatic IRA enrollment. On the other hand, the budget repeats a proposal from the prior year to place an overall cap on IRA and retirement plan accumulations. It also would restrict the ability to convert IRA money to Roth IRAs free of the Roth IRA income restrictions, restrict the payout term for inherited IRAs and impose required minimum distributions on Roth IRAs. The Republicans have proposed simplifying the retirement area, focusing more on enhancing Roth IRAs and repealing traditional IRAs. About the only common denominator here is simplifying the tax breaks in the retirement area, which likely makes it a topic to be included in any tax legislation this year, but there remains a lot of disagreement on the details, including the proposed caps.
- Corporate rate reduction. The budget proposes to reduce the corporate tax rate to 28 percent, with a 25 percent rate for domestic manufacturing. Rep. Camp last year tried for a 25 percent rate but had to include some provisions that were not very palatable to some of his fellow Republicans to achieve both revenue neutrality and that lower rate. With both sides proposing lower corporate rates, however, tax legislation could include some movement in this area.
- Additional proposals. Other proposals included in the budget that have received some bipartisan support include an expanded child and dependent care credit on the individual side, and repeal of last-in, first-out inventory accounting on the business side. A budget proposal for a new “second earner” tax credit for working couples could also garner bipartisan support. Budget proposals on the individual side to make permanent temporary enhancements to the Earned Income Credit and Child Tax Credit could also receive bipartisan support. On the business side, other budget proposals that could receive bipartisan support include a new business credit for insourcing costs, expanded availability of the cash method of accounting, and an increased deduction for start-up expenses. Some budget proposals in the administrative area — for example, to revise due dates for certain tax and information returns — also appear to have bipartisan support.
AREAS OF DISAGREEMENT
Some of the budget proposals, particularly on the revenue-raising side, appear to be non-starters with Republicans, who generally want spending cut-backs to pay for some of the tax breaks and rate reductions.
- Tax on capital gains and dividends. The budget proposes to raise the tax on capital gains and dividends to 28 percent, including the 3.8 percent tax on net investment income, up from a top rate of 23.8 percent currently. Republicans are focused on lowering individual rates as part of reform, not raising rates.
- “Buffett” rule. The budget renews a proposal to impose a minimum 30 percent tax rate on higher-income taxpayers. The Republicans again generally oppose this as a tax increase, rather than a rate reduction.
- Elimination of stepped-up basis. The budget proposes to replace stepped-up basis at death with a tax on appreciation at the date of death or date of gift. Exceptions would be made for a base level of gains, the first spouse to die, small family-owned businesses, and residences. The budget also proposes to return the exclusion for estate tax and lifetime gifts to 2009 levels. Republicans have proposed to eliminate stepped-up basis only in the context of estate tax repeal, and then to replace it with carryover basis, not immediate taxation.
- Expansion of small employer health insurance credit. The budget proposes to expand the credit available for small employers to provide health insurance. While Republicans might otherwise tend to support this proposal, this provision was originally enacted as part of health care reform, and therefore gets caught up in the Republican focus on trying to repeal the health care reform legislation.
- Taxing carried interest at ordinary income rates. The budget proposal to tax carried interest in service partnerships at ordinary income rates is held over from prior budgets. Republicans have tended to shy away from this as a tax increase, but there is also a sense of correcting an unfairness in the Tax Code that could bring some Republicans around on this issue.
- International tax reforms. The budget repeats proposals from prior budgets for a series of provisions targeting particular perceived abuses in the international tax area. Republicans would prefer to move to a territorial tax system, rather than targeting these particular areas.
- IRS budget. The budget proposes reversing budget cuts to the Internal Revenue Service over recent years. The Republicans appear to be still of a mindset to try to punish the IRS through budget cuts for perceived abuses.
- Regulation of return preparers. The budget proposes to give the IRS clear authority to regulate tax return preparers, overturning the outcome in recent court decisions. Some Republicans remain concerned about driving up the cost of tax preparation.
SUMMARY
While the list of areas of Republican disagreement with budget proposals may be as long as areas of agreement, there are likely to be enough areas of possible agreement in the proposals to indicate where compromise might be achieved on any tax legislative initiatives in 2015. The fact that there are even a couple of possible areas of agreement on the revenue-raising side is probably even more promising than areas of agreement on proposed tax breaks.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst at Wolters Kluwer Tax & Accounting US.
