Tax Breaks for Many Are Cut in Obama Budget
Business + Economy

Tax Breaks for Many Are Cut in Obama Budget

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Obama’s new budget proposal is far less generous in stimulus aid than his first two budgets, and cuts back on special tax treatment for wealthy Americans and corporate and financial firms while about one third of the proposals come from revenue hikes.

The 1,300-plus page document seeks to raise $129 billion over 10 years by limiting tax deferrals on income earned overseas, as well as $46 billion from repealing tax breaks to oil, gas and coal companies and $2.6 billion by axing farm subsidies to America’s richest farmers. It also reduces the size of fossil fuel research programs by 45 percent, or $418 million, instead directing more federal funding to green energy initiatives, including $8 billion for clean energy research and development, permanently extending the existing research and development tax credit, and revamping the $7,500 tax credits for buying an electric vehicle to allow customers to claim that rebate at the point of sale. In addition, it calls for increasing the Internal Revenue Service budget by 9.4 percent.

The plan targets the wealthy by proposing that the Bush-era tax cuts expire at the end of 2012 for individuals making more than $200,000 and couples making more than $250,000. It also calls for a 30 percent cut in itemized deductions for high-income taxpayers on charitable donations, mortgage interest deductions, and state and local taxes.  That additional revenue will be used to fund a three-year Alternative Minimum Tax adjustment to keep middle class taxpayers from being hit with higher tax bills.  Obama also resurrects his push to force financial firms to compensate taxpayers for the 2008 and 2009 bailouts with a Financial Crisis Responsibility Fee—what some dub a “bank tax.” The fee will apply to firms with more than $50 billion in assets and is expected to generate $30 billion over ten years.  (A similar measure was defeated by the Senate last spring.)

But upper-income individuals and businesses aren’t the only ones whose tax breaks are under attack.  The proposal aims to cut the Community Services Block Grant program, which is directed to low and moderate income families, by $300 million—a 7.5 percent decrease from fiscal 2011. It also slashes a program that helps low-income people pay their heating bills by about half, saving the federal government $2.6 billion in 2012.

‘Making the Numbers Look Better’?

Though the budget does not offer major aid to states, it does propose a two-year delay on state interest payments on increases in federal unemployment insurance taxes and their debt—a back-door form of tax reform, said Tracy Gordon, an expert on state and local public finances at The Brookings Institution.  The federal government’s wage floor to impose unemployment taxes is now $7,000 and the federal rate is 6.2 percent. “So the federal government is basically broadening the states’ base, without any action on their part, from $7,000 to $15,000, leaving existing rates in place, which means state would automatically get more revenue starting in 2014,” she said. 

The tax-related proposals are mostly a reprieve of earlier Obama budgets and stand little chance of surviving the appropriations process, according to Howard Gleckman, a senior fellow at The Urban Institute and author of the TaxVox blog.  “He’s proposed these revenue increases before. He couldn’t convince a Democratic Congress to accept them, and there’s essentially no chance he’s going to be able to convince Republicans to do so either,” said Gleckman.  “Most of this is just to make the numbers look better.”

The reality that the national discussion is shifting from economic stimulus to being more fiscally responsible is a positive step that is reflected in this budget, said Marc Goldwein, policy director of the Committee for a Responsible Federal Budget.  But although this budget plan does raise a fair amount of revenue by cracking down on tax loopholes, it doesn’t tread close enough to tax reform—the more pressing issue at hand, Goldwein said.  The president called on Congress to work with his administration to reform and simplify the tax system “without adding a dime to our deficit,” but he didn’t detail any specific proposals to do that. 

“This budget does limit deductions a little for high earners, but it doesn’t try to get rid of any of the existing credits or deductions,” Goldwein said.  “It doesn’t take us down the road of answering the fundamental question of what do we and don’t we want our tax code to look like. That’s a sort of failing on the President’s part.”