February 15, 2012
There's more than a tad of Robin Hood economics in the fiscal year 2013 budget that President Obama proposed on Monday. It would raise taxes on the wealthy, give some of that cash to the needy, and dole out the rest of it in ways designed to nudge the middle class toward higher education, energy savings, retirement planning and more.
First, the obvious: Don't race out and trade on the belief that Congress is waiting to rubber stamp this blueprint. The presidential budget is always a political document; in this election year it reads more like campaign talking points than a numbers document. But it may at least be seen as a preview of Obama's positions during the upcoming tax debate.
Congress is free to ignore the plan and Republicans, who control the U.S. House of Representatives, have made clear that it will be dead on arrival as their party prepares an election battle over taxes, spending and the size of the government.
Here are some of the key points and how -- if enacted -- they could affect the way taxpayers invest, retire, study and pay for healthcare.
-- Taxes on dividends and capital gains could diverge. President Obama has long said he favors letting the Bush tax cuts expire for the wealthiest of taxpayers -- defined by the White House as individuals earning more than $200,000 ($250,000 for joint filers).
But until this proposal, he has gone along with the current policy of long term gains and most dividends on stocks being taxed at the same rate. That would not be true if this budget passed: He proposes taxing dividends at the same rate as earned income for those high earners -- up to 39.6 percent in a post Bush-tax-cut world. Long term gains would be taxed at 20 percent for those high income taxpayers.
That could change the way some companies operate, suggests Charles Rothblut of the American Association of Individual Investors. They might be pressured to use extra cash to buy back shares, instead of paying dividends. It wouldn't necessarily push income-driven investors to buy bonds instead of stocks, he said; most bond interest is also taxed as ordinary income and bonds are vulnerable to losing value when interest rates rise.
-- Municipal bonds could become less valuable, so their rates could rise. Again, the Obama White House targets high earners in its proposal to limit the degree to which they could benefit from investing in tax-free munis. They could still write off the interest, but their deduction would be capped at the 28 percent tax bracket level. In order to make that worth their while, municipalities would have to raise the interest they pay on bonds. By the way, the proposal also caps all other itemized deductions at the 28 percent level, too.
-- The dreaded alternative minimum tax could disappear. Don't expect this to happen soon, because it's likely to get tied up in tax reform politics. But the Obama Administration is proposing an elimination of the AMT, which can snag families that have lots of kids and pay lots in taxes. Instead it is proposing the so-called "Buffet rule" that requires anyone earning more than $1 million to face a tax rate of at least 30 percent.
-- You'd pay more for Medicare. There's a slew of smaller provisions aimed at making Medicare slightly more means tested than it is now. Starting in 2017, the proposal would increase income-related premiums in section B (which covers doctors visits and similar services) and D (which covers prescription drugs) by 15 percent. Those higher premiums currently are required of taxpayers with income over $85,000 ($170,000 for couples filing joint returns). Obama proposes keeping the income threshold stable (not adjusting for inflation) until one in four beneficiaries are paying extra premiums which currently start at $55.60 a month (for B and D) and go up to $286.20 a month. Think those increases are insignificant? Not so, they would raise some $27.6 billion in their first six years.
The proposal also would increase Part B deductibles by $25 for new beneficiaries in 2017, 2019, and 2021, raising another $2 billion over the same six years.
-- Student aid could change this year. Without Congressional action, the interest rate on subsidized Stafford loans will rise from 3.4 percent to 6.8 percent on July 1, 2012. That seems to point to Congress acting before that date. Once legislators start tackling the Department of Education budget, other changes could ensue.
Among those requested by Obama: a doubling of work-study jobs funded by the federal government. The proposal would also greatly expand the funds available to $8 billion from $1 billion for the Perkins loan program, currently aimed at low income students, but it would remove the subsidies on those loans and allow interest rates to rise to 6.8 percent from the current 5 percent.
The budget also proposes that the current American Opportunity Tax Credit be made permanent. That credit, worth $2,500 a year for four years of college, is set to expire at the end of 2012.
Still fuzzy is President Obama's plan to target more aid to schools that hold the line on price increases. It's not clear how that could be accomplished without penalizing schools that have charged little but need to raise prices now, at the expense of schools that got big price increases in ahead of any new policy.
"Ultimately, that aid gets passed through to the students," said Haley Chitty, a spokesman for the National Association of Student Financial Aid Administrators.
-- Retirement is still on the radar. A familiar proposal is back: President Obama wants companies that don't offer retirement plans to enroll their employees in an automatic individual retirement account. That's been in several consecutive proposed budgets, but hasn't gone anywhere. Obama also is proposing that small businesses that start their own pension plans be given a tax credit of as much as $1,000 a year, for three years, to offset 50 percent of the costs of starting that pension. Currently it's $500 a year.
-- There would be $6 billion more for home energy savings, which would go to homeowners who retrofit their properties to be more energy efficient. It's not clear how that would be structured.
-- Expect first actions on payroll taxes and unemployment benefits. Those extra-long 99 week unemployment benefits are slated to expire on February 29, and President Obama has not suggested extending them. But he has budgeted for an extension of the payroll tax cut which also expires at the end of this month. Look for some linkage as legislators address both of those provisions.
(The Stern Advice column appears weekly, and at additional times as warranted. Linda Stern can be reached at firstname.lastname@example.org; She tweets at http://www.twitter.com/lindastern.;
Read more of her work at http://blogs.reuters.com/linda-stern;
Editing by Phil Berlowitz)