President Obama today transmitted to Congress his fiscal year (FY) 2017 budget, containing the administration’s recommendations to Congress for spending and taxation for the fiscal year that begins on October 1, 2016. Although there is no expectation that Congress will enact—or even vote on—the president’s budget as a whole, the budget represents the administration’s view of the optimum direction of spending and revenue policy.
The following discussion provides initial impressions of the tax-related items in the FY 2017 budget. Read a more detailed discussion of the tax provisions in the budget in a follow-up report: Tax provisions in the administration’s FY 2017 budget [PDF 1.1 MB]
The president proposes expenditures of $4.147 trillion. Expenditures would adhere to the sequestration caps of the Budget Control Act of 2011, as modified last Fall by the Bipartisan Budget Act of 2015, although the budget anticipates lifting the caps in future years.
The budget would, according to the White House, reduce the deficit by $2.9 trillion over 10 years. More than $900 billion of that reduction would be attributable to changes in the taxation of capital gains and the reduction of tax benefits for upper income individuals. It would also be achieved through changes in the taxation of international business income (which would raise almost $800 billion in new revenue over 10 years), and from other business tax changes (which would raise approximately $337 billion).
The president also proposes to impose a new fee on oil that would raise almost $320 billion over 10 years. That new revenue would be committed to investment in transportation information infrastructure as part of a multi-agency initiative to build a “clean” transportation system less reliant on carbon-producing fuels.
The budget also reiterates the president’s goal of cutting the corporate tax rate and making structural changes and closing loopholes. In The President’s Framework For Business Tax Reform (February 2012), he proposed cutting the corporate rate to 28%. The budget does not, however, provide sufficient revenue to offset the cost of such a rate reduction.
Many other tax proposals in the FY 2017 budget are familiar, having been included in previous budgets, such as:
Some previous proposals have been modified significantly, such as expanding the types of property subject to a proposed change to the like-kind exchange rules.
The FY 2017 budget also includes the proposal from last year’s budget to impose a tax on the liabilities of financial institutions with assets in excess of $50 billion of 7 basis points.
In place of the current system of deferral of foreign earnings, the president is again proposing 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.
As in the case of businesses, many of the individual (personal) tax proposals in the budget are familiar, including:
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, the Green Book* indicates that 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 FY 2017 budget also includes a proposal to expand the definition of net investment income to include gross income and gain from any trades or businesses of an individual that is not otherwise subject to employment taxes. The change would potentially affect limited partners and members of LLCs, as well as S corporation owners.
In response to concerns that employees in employer-sponsored health plans might unfairly become subject to the Affordable Care Act’s excise tax on high-cost plans because they reside in states where health care costs are higher than the national average, the president proposes modifying the threshold for application of the tax. The proposal would increase the threshold to the greater of the current law threshold or a “gold plan average premium” calculated for each state. (The tax currently is scheduled to be effective beginning in 2020.)
The Treasury Department on February 9 released an accompanying explanation of the tax proposals of the budget—Treasury’s Green Book* [PDF 1.57 MB]—that describes those proposals in greater detail.
*General Explanation of the Administration’s Fiscal Year 2017 Revenue Proposals.
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