President Barack Obama’s tax agenda didn’t start with rate increases alone and it won’t end there.
Just minutes after the U.S. House voted on Jan. 1 to set the top individual rate where Obama wanted, the president already was talking about changing the tax system further, “so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.”
As Obama begins a second term and another set of fiscal negotiations with Congress, he’ll work from a list of first-term tax-policy leftovers that target breaks for top earners and corporations. These include the tax benefits for oil and gas companies he often criticizes.
Republicans, who control the House, say they won’t give Obama more tax increases, making it difficult to see how the president can get what he wants. The rewrite of the tax code that both parties say they want is stalled, in part by the question of whether revenue would be used to reduce tax rates or lower the budget deficit.
“It’s interesting that year after year the president proposes the same list of tax hikes, yet the Democratic majority in the Senate wants nothing to do with them,” Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said in a statement questioning whether Democrats would support Obama’s tax plans. “Maybe this year will be different, with Democrats taking up these tax increases so voters can finally see what they stand for.”
Democrats say they’ll advance Obama’s tax agenda or something similar. Congress should resist Republican rhetoric about revenue-neutral tax changes and get “away from this notion that essentially we’re going to lower the tax rates and broaden the base,” Representative Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, said at a Jan. 15 breakfast sponsored by the Christian Science Monitor.
“We’ve already done $1.7 trillion in cuts,” Senator Charles Schumer, a New York Democrat, said on NBC’s “Meet the Press” Jan. 20. “We’ve done $600 billion in revenues. You’re going to need more revenues as well as more cuts to get the deficit down.”
Companies and trade groups that have spent the past four years fighting Obama’s tax policies are preparing for the next round.
“If we stay silent, the odds of it happening increase,” said Jade West, senior vice president for government relations at the National Association of Wholesaler-Distributors in Washington, which opposes Obama’s proposed repeal of the last-in, first-out accounting method. The plan would require companies to pay taxes on their reserves. “So we will stay very vocal and very engaged.”
The revenue quest could come in small chunks to help cover the cost of delays in automatic spending cuts set to start March 1 or prevent a government shutdown at the end of March. It could also be a broader effort if Republicans give in and agree on a revenue-raising overhaul of the U.S. tax code.
Over the past three years, Obama has insisted that higher taxes must be part of what he calls a “balanced” approach to deficit reduction that would at least stabilize debt as a percentage of the economy. He has said that his Nov. 6 re-election meant that the country endorsed that strategy. The Congressional Budget Office says the U.S. is on a long-term fiscal path that is unsustainable.
The $630 billion tax increase passed by Congress Jan. 1 gave Obama about 40 percent of the $1.6 trillion in tax revenue he sought in talks with Republicans in 2012. Obama said Jan. 14 that his goal for additional deficit reduction is $1.5 trillion over the next decade. If that’s split between revenue and spending, it suggests a $750 billion tax increase or somewhat less depending on how interest savings are considered.
Compared with the law in place for 2012, Congress raised tax rates on ordinary income, capital gains and dividends on taxable income exceeding $400,000 a year for individuals and $450,000 for married couples.
The estate tax rate also went up, to 40 percent from 35 percent. Taxpayers with adjusted gross incomes of $250,000 for individuals and $300,000 for married couples will face limits on personal exemptions and itemized deductions.
Almost everything Obama won in tax revenue came from leverage he held from the Dec. 31 expiration of President George W. Bush’s tax cuts and the momentum from Obama’s Nov. 6 re-election.
Much of the rest of his tax-raising agenda has been included in budget plans for the past four years and has been ignored or rejected by Congress. Obama will detail his tax proposals in his budget later this year; many of the tax increases have been in all four of his previous budgets.
The most significant item left on Obama’s list is a cap on tax breaks, which would limit their benefit to 28 percent. In other words, someone in the top tax bracket with $100,000 in charitable contributions who could deduct $39,600 because of the 39.6 percent rate would be able to deduct only $28,000.
Over his first term, Obama expanded the cap from itemized deductions to other breaks, and would require those in tax brackets above 28 percent to pay taxes on their employer-provided health insurance and municipal bond interest.
“Even the possibility of altering the tax treatment on outstanding municipal bonds -- essentially a retroactive tax -- creates uncertainty and would have adverse effects on governments needing to access capital markets,” government and market groups, including the National Governors Association, wrote to Obama and congressional leaders last month.
According to Obama’s most recent budget, the proposal would generate $584 billion over the next decade. That number will be smaller in the future because it was measured against some of the higher rates that Obama wanted and didn’t achieve.
Charitable groups, municipal bond proponents and the housing industry have been lobbying against the proposal for years. Levin said he didn’t favor accepting the Obama proposal “lock, stock and barrel.”
Similarly, oil and gas companies, private equity firms, wholesalers and multinational corporations have spent the past four years fighting these proposals.
“Taking a piece here and taking a piece there and looking at that deduction or that item over there, it doesn’t help, and it doesn’t necessarily strengthen the economy,” said Stephen Comstock, director of tax and accounting policy at the American Petroleum Institute.
The group objects to a set of Obama’s oil proposals, including repeal of oil companies’ ability to qualify for a domestic manufacturing deduction.
In concept, Obama has supported a revenue-neutral overhaul of the corporate side of the tax code that would lower the statutory rate to 28 percent from 35 percent for most companies.
For multinational corporations, Obama has proposed limiting their ability to defer U.S. taxation on some of the income they earn outside the country.
The list of proposals from Obama’s first four budgets might not be the end, said Catherine Schultz, vice president for tax policy at the National Foreign Trade Council, which advocates an open world economy.
Given Obama’s 2012 campaign rhetoric about companies’ offshore operations, she said, the president might offer up even more tax increases in his second term.