Budget: Executive summary of tax proposals in FY 2016 budget

Executive summary of tax proposals in FY 2016 budget

President Obama today, February 2, transmitted to Congress his fiscal year (FY) 2016 budget, containing the administration’s recommendations to Congress for spending and taxation for the fiscal year that begins on October 1, 2015.

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Overview

The president proposes expenditures for discretionary programs $74 billion above the spending caps set in the Budget Control Act of 2011, divided roughly equally between defense ($561 billion) and nondefense ($530 billion) discretionary programs.

The president also proposes a six-year $478 billion program for transportation infrastructure, the cost of which would be offset in part by a one-time tax on the unrepatriated foreign earnings of U.S. multinational corporations.

The tax on unrepatriated earnings would be part of a transition to a proposed fundamental change in the taxation of the future foreign earnings of U.S. corporations, which would be taxed on a current basis at a reduced rate.

The budget includes a reserve for business tax reform, but not one of sufficient magnitude for significant rate reduction. The president proposes reducing the corporate income tax rate to 28%, but the budget does not provide revenue to offset the cost of such a reduction. Instead, the budget refers only to eliminating tax expenditures, such as accelerated depreciation and “reducing the tax preference for debt financed investment.”

For individuals, the president proposes important changes in the taxation of capital gains. The rate of tax on capital gains would be increased for certain high earning individuals. In addition, bequests and gifts would be treated as realization events for purposes of taxing capital gains—a fundamental change in the taxation of estates.

Business tax revisions

Many other tax proposals in the FY 2016 budget are familiar, having been included in previous budgets, such as:

  • Reforms to the international tax system
  • Limiting the ability of domestic entities to expatriate
  • Repeal of natural resources production preferences
  • Repeal of LIFO and LCM accounting
  • Taxation of carried interests in partnerships as ordinary income
  • Insurance industry reforms
  • Marking financial derivatives to market
  • Modification of the like-kind exchange rules
  • Modification of the depreciation rules for corporate aircraft
  • Denying a deduction for punitive damages
  • Make permanent and reform the credit for research and experimentation
  • Make permanent the Subpart F exception for active financing income
  • Make permanent look-through treatment of payments between related CFCs

Some previous proposals have been modified significantly.

The rate of tax on the liabilities of financial institutions with assets in excess of $50 billion would be reduced from 17 basis points to 7 basis points, but the application of the tax would be broadened to include insurance companies, savings and loan holding companies, exchanges, asset managers, broker-dealers, specialty finance corporations, and financial captives. These changes have roughly doubled the revenue relative to the proposal in the FY 2015 budget.

New business tax proposals

The FY 2016 budget also includes a number of new and significant proposals. Chief among these is a fundamental reform of the system of taxation of the foreign earnings of U.S. companies, which would raise $474 billion over 10 years.

In place of the current system of deferral, the budget proposal would impose a minimum tax on foreign earnings above a risk-free return on equity invested in active assets. The minimum tax, imposed on a country-by-country basis, would be set at 19% less 85% of the per-country foreign effective tax rate. The new minimum tax would be imposed on a current basis, and foreign earnings could then be repatriated without further U.S. tax liability.

As part of the transition to the new system of taxation of foreign earnings, the budget would also impose a one-time 14% tax on earnings accumulated in CFCs that have not previously been subject to U.S. tax. A foreign tax credit would be allowed for foreign taxes associated with those earnings, reduced in proportion to the one-time tax rate relative to the maximum corporate rate. The transition tax would be payable ratably over five years.

Individual tax revisions

As in the case of businesses, many of the individual (personal) tax proposals in the budget are familiar, including:

  • Limit the tax value of certain deductions and exclusions to 28%
  • Impose a new minimum tax (the “Fair Share Tax”) of 30% of AGI
  • Limit the total accrual of tax-advantaged retirement benefits
  • Conform SECA taxes for professional service businesses
  • Restore the estate, gift, and GST parameters to those in effect in 2009

One of the key sets of revisions proposed by the president involves reforms to the taxation of capital gains for upper-income taxpayers, which would offset the cost of extension and expansion of tax preferences for middle and lower-income taxpayers.

The highest tax on capital gains would be increased from 23.8% (including the 3.8% net investment income tax) to 28%. In addition, a transfer of appreciated property would generally be treated as a sale of the property. Thus, the donor or deceased owner of an appreciated asset would be subject to capital gains tax on the excess of the asset’s fair market value on the date of the transfer over the transferor’s basis. The proposal provides a $100,000 per-person exclusion for gains realized by reason of death, and it would continue the current law exclusion for principal residences. Relief would also be provided for small businesses. These changes would raise about $208 billion over 10 years.

Revenue from imposition of new taxes on upper-income taxpayers would be used in part to offset tax preferences to middle and lower-income taxpayers, such as:

  • Increasing the maximum child and dependent care credit
  • Permanently extending increased refundability of the child tax credit
  • Expanding and making permanent the earned income tax credit
  • Creating a new $500 “second earner” tax credit
  • Permanently extending the American Opportunity Tax Credit

Treasury’s explanation

The Treasury Department on February 2 released an accompanying explanation of the tax proposals of the budget—Treasury’s Green Book [PDF 1.57 MB]—which describes those proposals in greater detail.

 

*General Explanation of the Administration’s Fiscal Year 2016 Revenue Proposals or “Green Book”

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