The administration budget for fiscal year 2017 includes a broad range of aggressive spending proposals supporting President Obama’s policy concerns. To comply with recent budget agreements, it also includes tax provisions that would result in $2.8 trillion in additional receipts over the next 10 years.
Presidential budgets are often best seen as aspirational documents and do not necessarily translate into legislation on either the spending or tax side. However, this budget, which begins on Oct. 1, 2016, serves to keep a number of ideas on the table into the November elections, and some of its provisions could be considered by this or future Congresses.
Nonetheless, the government remains deeply divided, with Republicans controlling Congress. The president’s previous budgets have typically had a cool reception on Capitol Hill, but the latest version is being greeted with open hostility. In fact, the House and Senate Budget Committee chairs have already noted
that they will not invite the director of the Office of Management of Budget to testify on the budget ― an unprecedented move.
But the budget can still be important. The Obama administration’s spending proposals reflect Democratic party policy, and the current Democratic presidential candidates have included some tax and spending proposals in their platforms. On the tax side, Hillary Clinton, for example, has embraced proposals aimed at high-income taxpayers, including the “Buffet rule” minimum tax and a limit on the value of itemized deductions.
Although not much legislative action is expected in an election year, less-controversial proposals can gain traction. Several of the president’s budget initiatives from fiscal year 2016, such as making the R&D credit and Section 179 small business expensing permanent, were passed by strong majorities of both houses of Congress as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015. Administrative and revenue-raising provisions in the budget, such as filing deadline changes and reporting new estate asset values, were also enacted last year.
The budget’s continued focus on the need to reform the corporate tax system, in particular the taxation of international activities of U.S. corporations, should also be noted. Although the approaches taken in the budget differ vastly from the mostly Republican proposals that have been discussed in Congress, the ongoing attention to this area suggests it will continue to be a focus of tax reform.
The 2017 budget includes several significant tax provisions that taxpayers should carefully evaluate. Although these provisions may not be enacted into law in the current Congress, they are likely to resurface as Democratic proposals no matter who is elected to the White House in November.
As in previous years, the lion’s share of new revenue comes from proposals aimed at international taxes and high-income taxpayers.
The budget recycles a bevy of international proposals that this year are estimated to raise almost $484 billion in revenue. They are highlighted by a 19% minimum tax on the foreign earnings of U.S. multinationals and a 14% tax on repatriated earnings. The administration’s provisions aimed at high-income taxpayers are headlined by four familiar proposals:
Change the taxation of carried interest in a partnership
Impose a 30% Buffet rule minimum tax
Limit the value of itemized deductions to 28%
Increase the tax rate on capital gains and dividends to 28%
The budget is also aimed at addressing the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting project, known as BEPS. As with last year’s budget, the fiscal year 2017 budget aims to strengthen Subpart F and restrict the use of hybrid mismatch arrangements that prevent the taxation of income in any jurisdiction. The budget also aims to address corporate inversions, which have dogged Congress in the past several years.
Medicare and self-employment tax
The administration this year also added a $272 billion proposal that is meant to close the gap between Self-Employment Contributions Act (SECA) taxes and the 3.8% tax on net investment income (NII). Under current law, a limited partner who materially or significantly participates in a partnership may not be required to pay either SECA or NII taxes. Similarly, an S corporation shareholder who is not passive in the S corporation does not pay employment or NII taxes on any distribution that is not treated as reasonable compensation.
The proposal would require all income from a trade or business that is not subject to SECA tax to be subject to the NII tax, and it would deposit all revenue from the NII tax into the Medicare Hospital Insurance Trust Fund. If would also provide a uniform set of standards, regardless of the type of entity for determining what is self-employment income. This would expand the reach of SECA taxes for many taxpayers under the NII tax thresholds, while providing a standard way to determine whether income is subject to SECA or NII tax for those over the threshold.
Oil and gas
One of the more controversial proposals in the president’s budget is a new $10.25 excise tax or fee per barrel of oil. The revenue, much like a gas tax, would be used to fund transportation. Despite historically low gasoline prices, the administration and Congress have long opposed gas taxes. As in past years, the budget proposal would repeal essentially every tax benefit for oil, gas and other mining operations, though the declining price of oil reduced the estimated revenue from these changes to $38 billion this year.
Compensation and benefits
The administration proposed two new notable changes in the compensation and benefits area. First, the administration proposes allowing unaffiliated employers to participate in a single multi-employer defined contribution retirement plan.
The second change is meant to salvage the wildly unpopular “Cadillac” excise tax on high-cost health care plans. The tax was enacted as part of Affordable Care Act (ACA) in 2010 and was originally scheduled to take effect in 2018. The PATH Act signed in December delayed it until 2020, but all the presidential candidates from both parties have pledged to repeal it before it takes effect.
The administration is seeking to soften the tax’s blow by allowing the cap on health care costs to be adjusted by the state. It would also make some allowances for calculating how much flexible spending arrangements count toward the cap. Some of the fiercest opponents of the tax have indicated that this compromise would not be acceptable.
In the budget, the administration requests $11.8 billion for IRS funding for the fiscal year, which is $530 million (or 4.7%) more than in the 2016 fiscal year. The administration also requests an adjustment to the IRS’s program integrity funding cap, seeking $515 million in the 2017 fiscal year that can be earmarked for tax enforcement and compliance activities. The administration expects such measures to contribute to reducing the so-called “tax gap” by potentially billions of dollars over the next several years.
IRS funding is likely to remain a relatively hot issue, however. As one of the primary agencies for administering the ACA ― legislation that still remains deeply unpopular with the Republican-controlled Congress ― as well as an agency still mired in controversy over its handling of tax exemption applications by certain conservative groups, the IRS has undergone dramatic funding cuts over the past several years. IRS funding levels decreased from approximately $13.4 billion in 2010 to $10.9 billion in 2015, which led to a cut in staffing and taxpayer services.
For more information, please contact Mel Schwarz
, Dustin Stamper
or Shamik Trivedi
in the Washington National Tax Office.
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