The White House released its budget proposal for fiscal year 2012 on Monday, with plans for eliminating capital gains taxes on small business investment, while also getting rid of tax breaks for the wealthy and for fossil fuels.
“Because small businesses are critical creators of new jobs and economic growth, the budget eliminates capital gains taxes for investments in small firms and includes measures to increase these firms’ access to the loans they need to meet payroll, expand their operations, and hire new workers,” said President Obama in a message accompanying the budget.
However, the budget also proposes to eliminate the recently extended Bush tax cuts for those making over $250,000, as well as tax breaks and subsidies for oil, gas, and coal.
“In addition to closing loopholes that allow wealthy investment managers to not pay income taxes on their earnings and ending subsidies for big oil, gas, and coal companies, the budget eliminates the Bush tax cuts for those making more than $250,000 a year and devotes those resources instead to reducing the deficit,” wrote Obama. “Our nation could not afford these tax cuts when they passed, and it cannot afford them now.”
Other parts of the proposed budget would bring the estate tax back to the 45 percent maximum with a $3.5 million per person exemption, the level it was at in 2009. It also includes offsets for three years of patching the alternative minimum tax to prevent it from spreading to millions more taxpayers, according to Bloomberg News.
Other proposals would restrict multinational companies from deferring taxes on earnings abroad, and to tax carried interest income earned by partners at investment firms at ordinary income rates as opposed to capital gains tax rates. Another proposal would let auto dealers collect a $7,500 tax credit on the sale of plug-in electric cars, which presumably would be passed along to customers. Currently, buyers of the cars need to claim the tax credit later when they file their tax returns.
Another proposal would repeal the expanded 1099 information reporting rules for purchases of goods, though not of services from corporations, totaling more than $600 a year. Congress is trying to repeal the expanded reporting requirements for both goods and services.
Another proposal would repeal the requirement for retirees to take a minimum distribution from individual retirement accounts after the age of 70 and a half if the amount in the account is under $50,000.
Among the reductions in tax breaks for the coal industry are the expensing of exploration and development costs, and the domestic manufacturing deduction and percent depletion for hard mineral fossil fuels. For the oil and gas industry, the budget would repeal the enhanced oil recovery credit, the credit for oil and gas produced from marginal wells, expensing of intangible drilling costs, percentage depletion for oil and natural gas wells, and the domestic manufacturing tax deduction.
In addition, the Internal Revenue Service is encouraged to promote electronic filing, and there is more money for IRS enforcement efforts.
The budget would modernize the IRS to improve customer service and invests over $240 million in new tax compliance activities designed to reduce the tax gap (the difference between taxes owed and taxes paid) and boost tax collections by $1.3 billion per year by fiscal year 2014. The budget also includes investments to increase the response rate to taxpayer inquiries, improve tax enforcement, and modernize IT systems “to make interactions with the IRS quicker, smoother, and more effective,” according to a fact sheet on the Treasury Department budget.
“It appears that they are holding steady on a full funding of the IRS, including a budget increase, which we think is important,” said Edward Karl, vice president of taxation at the American Institute of CPAs.
The Treasury Department's "green book" containing explanations of the administration's fiscal year 2012 revenue proposals also deals with efforts at tax simplification. “They have a section dealing with simplification of the Tax Code,” said Karl. “They are very targeted. We applaud any effort to reduce the complexity of the federal Tax Code.”
The budget also proposes to improve debt collection activities through initiatives that would increase collection of unpaid debt by more than $5 billion over the next 10 years from individuals and businesses that have failed to pay taxes or repay government loans, a significant portion of which will be returned to states, according to the Treasury budget fact sheet.
To protect the maximum Pell grant award, the budget also eliminates the new “year-round Pell grant” which provides two grants in a single award year, and creates a long-term funding stream for the Pell grant program “by eliminating ineffective in-school interest subsidy for graduate students,” according to the Education Department budget fact sheet. However, this means that the proposed budget would eliminate Pell grants for summer classes and would require graduate students to immediately begin accruing interest on student loans.
The budget proposal released Monday would also allow states to raise the amount of wages subject to unemployment taxes from companies starting in 2014, while letting states avoid raising taxes on businesses for the next two years to cover interest owed to the federal government on money they borrowed to fund their unemployment programs (see Obama Expected to Propose Payroll Tax Changes).
The proposal would provide short-term relief to employers by suspending interest payments on state unemployment insurance debt and suspending the Federal Unemployment Tax Act, or FUTA, credit reduction for employers in borrowing states in 2011 and 2012, according to the Treasury Department green book. The proposal would also raise the FUTA wage base to $15,000 (from $7,000) per worker paid annually in 2014, index the wage base to wage growth for subsequent years, and reduce the net federal UI tax from 0.8 percent (after the proposed permanent extension of the FUTA surtax) to 0.38 percent. States with wage bases below $15,000 would need to conform to the new FUTA base. States would maintain the ability to set their own tax rates, as under current law.
The FUTA currently imposes a federal payroll tax on employers of 6.2 percent of the first $7,000 paid annually to each employee. Generally, these funds support the administrative costs of the unemployment insurance benefits system. Employers in states that meet certain federal requirements are allowed a credit against FUTA taxes of up to 5.4 percent, making the minimum net federal rate 0.8 percent. States that become non-compliant experience a reduction in FUTA credit, causing employers to face a higher federal UI tax.
Sen. Dick Durbin, D-Ill., said Monday that he plans to introduce legislation this week that would give states tax relief for two years on the interest owed to the federal government for the funds they borrowed to cover their unemployment benefit programs.
Senate Finance Committee ranking member Orrin Hatch, R-Utah, criticized the White House budget proposal. “With at least $1.6 trillion in job-destroying tax increases, this budget fails to preserve the pro-growth policies needed to expand our economy, create jobs, and reduce the deficit,” he said in a statement. “Keeping pace with its liberal tax-and-spend agenda, the Obama Administration hits almost every sector of our economy with a tax hike - energy taxes, taxes on hiring, higher income taxes. That's not how we get our country moving forward.”
The new chairman of the House Ways and Means Committee, Dave Camp, R-Mich., also took a shot at the proposals. “In the face of record-high deficits and continued high levels of unemployment, a budget that imposes massive job-killing tax hikes on small businesses and fails to address entitlement reform or tax reform is hardly the answer," Camp said in a statement. "Rather than setting the stage for broad-based, pro-growth tax reform, this budget goes in the opposite direction with more tax hikes."
SEC Chairman Mary Schapiro welcomed the president’s FY 2012 budget request of more than $1.4 billion for the SEC, though. “These funds will provide the SEC with the resources needed to carry out both our longstanding core mission as well as our new responsibilities for derivatives, hedge fund advisers and credit rating agencies," she said in a statement. "By law, the 2012 funding is entirely offset by transaction fees such that the SEC budget will not add to the deficit.”
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