U.S. Department of Treasury: Administration’s Fiscal Year 2013 Budget Proposes Tax Policy to Boost Growth, Create Jobs and Improve Opportunity for Middle Class
Feb 13, 2012
The U.S. Department of Treasury issued the following news release on February 13, 2012 regarding the Administration’s Fiscal Year 2013 Budget:
The President’s Fiscal Year 2013 (FY2013) Budget demonstrates his continued commitment to addressing the two key imperatives we face today – supporting growth and job creation, now and into the future, while making the necessary fiscal reforms to bring down projected deficits. Though often viewed as separate, these goals complement and depend upon each other. Stronger growth now and investments in future productivity will make our future debt challenges more manageable, while locking in credible deficit reduction, phased in to protect the fragile economy, will allow us to invest in strengthening growth and job creation now.
Today, the U.S. Department of the Treasury released a key document that points the way toward meeting these intertwined challenges – the General Explanations of the Administration’s FY2013 Revenue Proposals, or “Greenbook.” The Greenbook explains the Administration’s revenue proposals included in the Budget that seek to boost near-term growth; provide permanent middle-class tax relief; encourage onshore investments in manufacturing and insourced jobs; cut taxes for small businesses; add balance to deficit reduction by asking the most fortunate Americans to contribute; and limit incentives for shifting income and assets overseas.
The President is committed to working with Congress to undertake comprehensive tax reform to cut tax rates and complexity, cut inefficient tax breaks, cut the deficit by $1.5 trillion, and increase jobs and growth in the United States-while observing the “Buffett Rule” that people making more than $1 million should not pay a smaller share of their income in taxes than the middle class pays.
As a contribution to the national conversation about tax reform, the President’s Budget includes a detailed set of specific tax loophole closers and measures to broaden the tax base that, together with the expiration of the high-income tax cuts, would exceed the $1.5 trillion deficit reduction target for tax reform, cut inefficient tax expenditures, and move the tax system closer to observing the Buffett Rule.
- Extend the payroll tax cut. Under the compromise tax package passed at the end of 2010, the employee Social Security payroll tax rate was reduced temporarily from 6.2 percent to 4.2 percent for 2011. This reduction was further extended in December, but only through the end of February 2012. The Budget proposes to extend the payroll tax cut through the end of 2012, providing a total of $1,000 in tax relief in 2012 for a household earning $50,000. Extending the payroll tax cut would provide $94 billion in benefits over the next 10 years.
- Extend 100-percent first-year depreciation deduction for certain property. As part of the compromise tax package passed at the end of 2010, additional first-year depreciation was increased to 100 percent for qualified property through the end of 2011. The Budget proposes to extend this powerful incentive for businesses to invest for an additional year. Extending 100 percent depreciation would provide $58 billion dollars in benefits in tax year 2012, at a time when tax relief is needed.
- Provide a temporary 10-percent tax credit for new jobs and wage increases. The Budget proposes to provide a new income tax credit for employers who increase their payroll, whether through job creation, increased wages, or both. The maximum amount of the increase in eligible wages would be $5 million per employer, targeting the 98 percent of firms that have a payroll below that threshold, for a maximum credit of $500,000. The credit would be available for wage increases in 2012 and would provide $18 billion in benefits over the next 10 years.
- Providing temporary tax credits for domestic clean energy manufacturing.The President is proposing to extend tax credits to drive nearly $20 billion of investment in domestic clean energy manufacturing, ensuring new windmills and solar panels will incorporate parts that are produced and assembled by American workers. This Advanced Energy Manufacturing Tax Credit – which was oversubscribed more than three times over – goes to investments in clean energy manufacturing in the United States. The additional $5 billion in tax credits the President is proposing will leverage nearly $20 billion in total investment in the United States.
TAX RELIEF FOR INDIVIDUALS AND FAMILIES
- Make the American Opportunity Tax Credit (AOTC) permanent. Currently authorized through 2012, the AOTC provides taxpayers a credit of up to $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student’s post-secondary education. The Budget proposes to make the AOTC permanent, providing up to $10,000 for a student in their family over four years in college. More than 9 million families with students will receive an average AOTC of nearly $2,000 in 2012. Making the AOTC permanent would provide $137 billion in additional benefits over the next 10 years.
- Expand the Earned Income Tax Credit (EITC) to support working families. The EITC is available to low- and moderate-income working families. The Budget proposes to make permanent an expansion of the EITC for families with three or more qualifying children. This provision will increase the credit for larger families by up to 12.5 percent, or nearly $675 in 2013. More than 2 million families will receive an average increase in EITC of nearly $600 as a result of this provision in 2012. This proposal would provide $14 billion in benefits over the next 10 years.
- Provide for automatic enrollment in individual retirement accounts (IRAs). Only about half of American employees today are covered by a pension plan at work. This proposal will improve retirement security for millions of workers by requiring employers with more than 10 employees, who do not offer a retirement plans, to offer an automatic IRA. With an automatic IRA, retirement savings are deducted from each paycheck and deposited in the worker’s own account. Employers do not make contributions, and employees can opt out of the program at any time. The proposal also includes a credit to help small employers set up auto-IRA arrangements, and it doubles the existing start-up credit for small employers who offer a retirement plan, such as a traditional pension or 401(k). This proposal would provide $15 billion in benefits over the next 10 years.
- Preserve Middle-Class Tax Relief. The Administration’s Budget also assumes that the 2001 and 2003 tax cuts are made permanent for lower- and middle-class families, saving them about $1 trillion over the next 10 years.
Expand Manufacturing and Insourcing Jobs in America
- Provide tax incentives for locating jobs and business activity in the United States and prohibit tax deductions for shipping jobs overseas. The Budget proposes to create a credit against income tax equal to 20 percent of the expenses paid or incurred in connection with insourcing a U.S. trade or business. The proposal would disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business to reduce incentives for U.S. companies to move jobs offshore. Together providing tax incentives to insource jobs and prohibiting tax deductions for outsourcing jobs would largely cancel each other out, costing a total of $90 million over the next 10 years.
- Provide a new “Manufacturing Communities” tax credit. The Budget proposes to create a new tax credit to encourage investments in communities affected by military base closures, plant closures, and mass layoffs. This proposal would provide about $2 billion in credits for qualified investments approved in each of three years, 2012 through 2014.
- Target the domestic activities production deduction to domestic manufacturing activities and provide a larger deduction for advanced manufacturing activities. The Budget proposes to disallow the deduction for domestic production activities (commonly referred to as the manufacturing deduction) for oil and other fossil fuel production, as well as for certain other nonmanufacturing activities. The revenue resulting from this limitation would be used to increase the general deduction percentage and double the deduction rate even more for activities involving the manufacture of certain advanced technology property. This proposal is approximately revenue neutral.
- Enhance the research and experimentation (R&E) credit and make it permanent. The Budget proposes to enhance the R&E tax credit by increasing the credit rate for the alternative simplified credit from 14 percent to 17 percent and making it permanent to encourage innovation and reward businesses that continue to invest in research projects. Making the credit permanent would remove uncertainty about whether the R&E credit will be extended, giving businesses greater confidence to invest in innovation that creates jobs in the United States This proposal would provide $109 billion in benefits over 10 years.
Tax Relief for Small Business
- Permanently eliminate capital gains tax on investments in qualified small business stock. The Budget would make permanent the President’s proposal to completely eliminate the capital gains tax for investors in certain qualified small businesses. This provision was enacted as part of the Small Business Jobs Act and was extended through 2011 as part of the December tax compromise. Making this provision permanent– and also making it easier to use by giving investors a longer time to roll over qualified investments and making sure that the income is not subject to the Alternative Minimum Tax-would save small business owners $8 billion over the next 10 years.
- Double the amount of currently deductible start-up expenditures. Under current law, a taxpayer generally is allowed to elect to deduct up to $5,000 of start-up expenditures in the year a business begins and to amortize any remaining costs. For 2010 only, the immediately deductible amount was doubled, from $5,000 to $10,000 (reduced by the amount by which the cumulative cost of start-up expenditures exceeds $60,000). The Budget proposes to permanently increase the immediate deduction amount to $10,000. This would save entrepreneurs about $3 billion over the next 10 years.
- Expand and simplify the small business health care tax credit. The Affordable Care Act created a new tax credit, effective beginning in 2010, that covers up to 35 percent (rising to 50 percent in 2014) of an eligible employer’s premium contributions towards their employees’ health insurance. The Budget proposes to expand the tax credit to additional employers (including by increasing the eligibility cut-off from 25 to 50 workers), change the phase-out formula so firms that appear eligible will qualify for some credit, and simplify the calculation of the credit (by removing a requirement that an eligible employer pay a uniform percentage of the premium for each employee and also eliminating a cap on the credit based on the average health insurance premium in the employer’s state). This would provide an additional $14 billion in tax relief to small business owners over the next 10 years.
A Credible and Balanced Plan to Address Budget Deficits
- Allow the 2001 and 2003 income tax cuts to expire (including the low tax rate on dividends) for households making more than $250,000 per year and restore the estate tax to 2009 levels. The last decade saw massive tax cuts targeted disproportionately at the most affluent Americans. While the President accepted a temporary extension of the high-income tax cuts at the end of 2010 as part of a compromise to protect the middle-class tax cuts and provide an important boost to the economy, the high-income tax cuts do very little to support economic growth. Moreover, they give an average of more than $100,000 in tax breaks to those earning more than $1 million per year, making our tax system less fair, and are unaffordable in light of our fiscal situation. Sustaining these unaffordable high-income tax cuts would require either borrowing more, increasing taxes on the middle-class, or deep cuts in other parts of the Budget that help seniors, the middle-class, and the most vulnerable. The President’s Budget would instead reflect shared sacrifice by allowing income tax rates that exclusively affect upper-income households to return to the levels they were at throughout most of the 1990s; tax dividends as ordinary income for married taxpayers with income more than $250,000 and single taxpayers with income more than $200,000; and restore the tax on large estates to 2009 levels.Allowing these temporary tax cuts to expire as scheduled at the end of 2012 will avoid increasing the deficit by nearly $1 trillion over the next 10 years.
- Limit certain tax expenditures for the most affluent by capping itemized deductions at 28 percent. The Budget proposes to limit the tax subsidy for itemized deductions for high-income families to 28 percent – the same level that was in place at the end of the Reagan Administration. This year’s proposal builds on the legislative language in the American Jobs Act and expands the limitation to other deductions and income exclusions claimed by high income taxpayers such as tax-exempt state and local bond interest, contributions to retirement accounts, employer-sponsored health insurance, and deductions for income attributable to domestic production activities. It would raise more than $580 billion over the next 10 years.
- Eliminate the carried interest loophole for hedge fund managers and other similar investment service providers. The 2013 Budget proposes to change the tax treatment of carried interests in investment partnerships, which present the greatest opportunity for highly compensated service providers to be taxed on their services income (the earnings they receive for performing services) at capital gains rates, which are lower than the tax rates most moderate-income Americans pay on their earnings. Closing this loophole would raise more than $13 billion over the next 10 years.
- Eliminate special depreciation rules for purchases of corporate jets and other general aviation passenger aircraft. Under current law, airplanes used in commercial and contract carrying of passengers and freight generally are depreciated over seven years. Airplanes not used in commercial or contract carrying of passengers or freight, such as corporate jets, generally are depreciated over five years. The Budget proposes to increase the depreciation recovery period for general aviation airplanes that carry passengers to seven years. Closing this loophole would raise $2 billion over 10 years.
- Combating transfer pricing abuses. President Obama and Secretary Geithner are committed to rolling back incentives to shift income and assets overseas. A prime example is “transfer pricing” abuse – when multinational corporations effectively transfer intangible assets like copyrights and trademarks to subsidiaries in overseas tax havens at artificially low prices. Transfer pricing abuse shifts profits overseas while avoiding the taxes they would pay on a fairly priced transaction. Under the Budget proposal, excessive profits related to the offshore use of transferred intangibles would be taxable in the United States, thus restricting the tax incentive to engage in transfer pricing abuses. This proposal, along with a related proposal to clarify the definition of intangible assets, would raise more than $23 billion over the next 10 years.
- Other reforms to reduce incentives to shift income and assets overseas. In addition to transfer pricing reform, the Budget includes a broader package of international tax reforms that has been designed to reduce incentives to shift income and assets overseas. For example, U.S. businesses that borrow money and invest it overseas can claim the interest they pay as a business expense and take an immediate deduction to reduce their U.S. taxes under current law, even if they pay little or no U.S. taxes on their overseas investment. The Budget would eliminate this tax advantage for overseas investment by requiring that the deduction for the interest expense attributable to overseas investment be delayed, saving $37 billion over the next 10 years. Overall, the Budget’s proposals to reform international tax rules will raise $148 billion over the next 10 years.