Obama Looks to Limit Tax Breaks for Wealthy
President Barack Obama asked lawmakers to again consider increasing taxes for high earners, private equity managers and oil and gas companies to pay for his $447 billion job-creation package, running into Republican resistance along the way.
The bill Obama sent to Capitol Hill yesterday included previously proposed revenue-raising provisions, such as a cap on deductions for upper-income taxpayers, which have failed to advance in Congress in recent years. The administration also proposed new ideas that would change longstanding tax policy. Obama wants to curb the amount of interest from municipal bonds that top earners could exclude from their income and require those taxpayers to count some of their employer-provided health insurance as taxable income.
Obama has proposed raising $18 billion by taxing the carried interest, or profits-based compensation, of private equity managers, real estate investors and venture capitalists as ordinary income, instead of more lightly taxed capital gains. That would affect companies including Blackstone Group LP (BX) and KKR & Co.
The release of the plan sets up a political fight with Republicans in Congress that will frame Obama’s strategy for a re-election campaign next year.
Obama would use the revenue in part to offset the cost of cutting the payroll tax for employers and middle-class taxpayers along with infrastructure programs. Republicans, who control the House of Representatives, have signaled they may be willing to support some of the tax cuts while expressing skepticism about Obama’s spending and tax increase proposals.
“If the president is truly interested in growing the economy and putting Americans back to work, then he’ll leave the temporary proposals and the half-measures -- and the tax hikes - - aside,” Senate Minority Leader Mitch McConnell, a Kentucky Republican, said on the Senate floor today.
House Majority Leader Eric Cantor said Republicans won’t accept tax increases as part of a plan for economic growth.
“My sense is that we need to work very hard to try and peel off the things that we can actually agree on,” the Virginia Republican told reporters today.
Obama would sign a bill even if it contained only some provisions of his proposal, White House press secretary Jay Carney said.
If Congress were to “send a portion of the American Jobs Act, the president would of course not veto it,” Carney told reporters traveling with Obama to an event to promote it in Ohio. “He would sign it and then he would return to press the Congress to get the job done.”
The biggest revenue-raising proposal in the jobs package -- about $400 billion -- would cap at 28 percent itemized deductions and some exclusions for individuals earning more than $200,000 a year and married couples earning more than $250,000.
Andrew Schulz, vice president for legal and public policy at the Council on Foundations in Arlington, Virginia, drew a distinction between charitable contributions that don’t directly benefit a taxpayer and deductions for items such as mortgage interest.
“This is the very last moment in time that you would think it would be productive to limit the funding of the charitable sector,” he said in an interview.
Municipal bond income is included in the cap under the new proposal, marking the administration’s first attempt to curb that benefit. That could hurt demand for state and local government securities, said lobbyists who work in the public finance sector.
The administration has previously proposed caps that focused only on itemized deductions, meaning that the highest- income taxpayers would receive a smaller federal break on their mortgage interest, state and local taxes and charitable contributions.
The new version also imposes a limitation on so-called above-the-line deductions and certain exclusions, including income earned outside the U.S. and employer-provided health insurance. Affected above-the-line deductions include breaks for moving expenses, higher education expenses and contributions to health savings accounts. The $400 billion revenue estimate is 25 percent higher than the administration’s $321 billion estimate for the itemized deduction cap, indicating the scope of the expanded proposal.
Industry groups affected by the revenue-raising proposals said they plan to lobby heavily against them.
“Proposals to raise taxes on carried interest have consistently been rejected for over four years because raising taxes on investments would only sideline employers and investors and create further uncertainty in an already struggling economy,” Steve Judge, interim president and chief executive officer of the Private Equity Growth Capital Council, the industry’s Washington-based trade group, said in a statement.
The oil and gas industry would face $40 billion in new taxes over the next decade. Obama’s budget proposal included limits on the industry’s ability to claim domestic manufacturing deductions for drilling. Companies including Exxon Mobil Corp. (XOM) and Royal Dutch Shell Plc (RDSA) have opposed the administration’s proposal.
Another $3 billion would come from changing the depreciation schedule for corporate jets to match the longer schedule associated with commercial airliners.
The proposal would have $467 billion worth of savings and higher revenue, more than offsetting the cost of cutting payroll taxes and spending on infrastructure and state aid, White House budget director Jack Lew said. A congressional supercommittee charged with finding long-term deficit reductions can accept Obama’s proposal to pay for the package or come up with its own plan later this year, Lew said.
“We’ve got to decide what our priorities are,” Obama said as he released the legislative text yesterday. “Do we keep tax loopholes for oil companies -- or do we put teachers back to work? Should we keep tax breaks for millionaires and billionaires -- or should we invest in education and technology and infrastructure, all the things that are going to help us out-innovate and out-educate and out-build other countries in the future?”
Gene Sperling, director of the White House National Economic Council, said the administration wants Congress to pass the proposal “in its entirety” and not separate the offsets, spending and tax cuts.
If only parts of it were passed by Congress, Obama would view that as “partial progress,” and that he would “come back and fight and fight to get the other components,” Sperling told reporters after defending the jobs program during a speech today at the American Action Forum, a Washington-based research group.
Obama’s jobs plan will likely put the supercommittee in an even deeper hole because it would have to come up with additional money to prevent the administration’s proposal from widening the deficit.
The 12-member panel faces an uphill battle to produce a plan to cut at least $1.2 trillion from the federal budget by Nov. 23. If the panel doesn’t act, or if its plan is rejected by Congress, an automatic $1.2 trillion in cuts would take effect in 2013.
The centerpiece of Obama’s plan to boost hiring and economic growth is a cut in the payroll tax, which covers the first $106,800 in earnings and is evenly split between employers and employees. Obama would reduce the portion paid by workers next year to 3.1 percent from 4.2 percent now. The rate was reduced by two percentage points under the terms of a tax deal reached in December. That cut is set to expire Dec. 31, which would push the tax rate back to 6.2 percent.
Businesses would get a payroll tax cut for their first $5 million in wages and would pay no payroll taxes on the first $50 million of incremental wages in 2012, compared with 2011.
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