Last Obama Budget Has Few Tax Changes, Gets Cool Response

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Feb. 9 — Congressional Republicans predictably panned President Barack Obama's final budget proposal, particularly its tax revenue components.

The administration's ideas generally lack originality and fail to focus on federal fiscal concerns, several of them said, despite enforcement and offset themes throughout the White House blueprint. Obama's 2017 budget is another failure, said Senate Finance Committee Chairman Orrin G. Hatch (R-Utah).

“He put us in such permanent debt that we'll never get over it,” Hatch told reporters Feb. 9.

His criticism permeated other party responses.

Budget committees in the House and Senate won't hold hearings on Obama's budget plan for the 2017 federal fiscal year because “everybody up here is pretty much familiar today with the budget proposals because they are pretty much the same that we've seen in the last several years,” said Sen. John Thune (R-S.D.). This latest iteration “arrived with a resounding thud here in the Congress of the United States,” said Sen. Roger Wicker (R-Miss.).

Treasury: ‘Realistic Response.'

Still, administration officials pushed elements of the plan as a realistic response to widening federal debt, even if only a handful of them are new.

Proposals to cut down on tax avoidance by U.S.-based companies that hold profits abroad and passthroughs whose partners escape a 3.8 percent Medicare tax are part of that goal, as are proposals to pay for business and household tax breaks enacted at the end of last year, said a senior Treasury Department official.

Obama's business tax proposals from last year were revenue neutral, but Congress agreed only to revenue-losing provisions so “what's remaining of the president's plan would be revenue-raising in the long run,” the Treasury official said.

$2.8 Trillion in Revenue

Overall, the White House budget would raise nearly $2.8 trillion in revenue from fiscal 2017 through fiscal 2026, according to Treasury estimates.

Among international tax proposals aimed at minimizing incentives to shift income overseas, not to mention companies and their headquarters, Obama's blueprint reprised calls for a 19 percent minimum tax on all earnings from abroad when earned, with no deferral, after which the remaining money could be distributed stateside with no additional tax liability. It also would include a one-time, 14 percent repatriation tax on overseas-accumulated earnings currently sitting abroad.

The former provision would raise $350.4 billion over the 10-year budget window, and the latter would raise $299.4 billion over the same period. Both amounts exceed previous revenue forecasts because more profits have built up or been shifted abroad since the last official estimate, in addition to some changing economics, the Treasury official said (see related story in this issue).

Subjecting more businesses organized as passthroughs to the 3.8 percent Medicare tax would raise $271.7 billion by including gross income in the definition of net investment income, as well as gains from any trades or businesses of an individual that is not otherwise subject to employment taxes, according to Treasury's revenue forecast. The same tax should apply regardless of whether income is generated by labor effort or capital, the Treasury official said of the provision, which was one of just a half-dozen new revenue proposals in the budget.

“It eliminates loopholes and planning opportunities for taxpayers who today are able to claim differential tax treatment, depending on the business entity or legal form of the business entity or legal form of the payment received,” the Treasury official said.

R&D Credit Common Ground

A repeat proposal to put a 28 percent ceiling on most tax deductions and exclusions would raise more revenue than anything else in the budget plan—$645.5 billion.

Increasing the highest long-term capital gains and qualified dividend tax rate to 24.2 percent from 20 percent, and treating death as a transferable event for inheritors, would raise $235.2 billion. A seven-basis-point fee on U.S. financial firms with assets of more than $50 billion would raise $111.4 billion.

Another major revenue raiser—and one of the few new proposals—is a $10.25-per-barrel-of-oil tax phased in over five years, which would bring in $319.1 billion.

Revising the newly permanent research and development tax credit would streamline it as part of the administration's budget.

It would repeal the traditional credit and let companies choose a higher alternative simplified research credit of 18 percent of research expenses that exceed half of the average qualified research expenses for the three preceding taxable years, up from 14 percent, at a cost of $27.2 billion. It would also eliminate a reduced alternative rate of 6 percent and allow the credit to offset alternative minimum tax liability for all taxpayers, among other potential changes, all of which would amount to a “huge improvement” over current policy, the Treasury official said.

Such proposals open the door just a bit for some common ground with congressional Republicans, given that House Ways and Means Committee Chairman Kevin Brady (R-Texas) has introduced legislation in the past to raise the alternative simplified research credit to 20 percent and streamline it in other ways, too. A Brady staffer called the R&D language encouraging but said the budget ideas fall short, overall.

“We know that making the United States an attractive location for research and development requires a robust R&D credit and lower rates,” Brady's aide said.

With assistance from Casey Wooten in Washington.

To contact the reporter on this story: Aaron E. Lorenzo in Washington at aaron@bna.com
To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com