The Obama Administration's Tax Proposals

For the first time in several years, Treasury’s so-called “Green Book” is being taken seriously. The Green Book, released May 11th,  is an annual compilation of the Administration’s tax proposals, both for raising revenue and offering relief. This year, with a Democratic Congress and President, the stars appear to be aligned for serious consideration of proposals that in recent years would have been considered “dead on arrival.” Among other things, including historic budget deficits, health care reform, if enacted, will cause Congress to consider serious revenue-raising proposals this year, some of which would be specially dedicated to the cost of bringing millions of Americans under some form of health coverage. Some of the new Administration’s proposals are striking in terms of the interests that are being tapped for more revenue. Some highlights:

• The basic regime for taxation of U.S. multinationals operating abroad would change with the proposed end of deferral (with the exception of research and experimentation expenses); repeal of the so-called 80-20 company rules; a new calculation of the foreign tax credit on a pooling basis; provisions to limit the splitting of foreign income and taxes for foreign tax credit purposes; new limits on earnings stripping by expatriate entities; reform of the business entity classification rules for foreign entities, and other proposals.
• Extensive new reporting and withholding provisions on offshore accounts would be imposed, requiring banks and other financial institutions to greatly increase their knowledge of and responsibility for deposits and transactions of all kinds to retard tax evasion.
• Superfund taxes would be reinstated by re-imposing Superfund excise taxes and re-imposing the broadly applied Superfund Environmental Income tax on corporate income that was last imposed in 1996.
• The elimination of a number of longstanding oil and gas company provisions including expensing for intangible drilling costs, the tax credit for enhanced oil recovery projects and marginal wells; percentage depletion and the domestic manufacturing deduction for oil and gas production, among others.
• Health Care Reform would be paid for, at least partially, through numerous, largely unrelated, provisions whose revenues would be dedicated to a “Health Reform Reserve Fund” totaling over $325 billion. They include, among other items, imposing a new “cap” on itemized deductions--including the deduction for health care expenditures--no higher than at the value available to taxpayers in the 28% tax bracket, after separately reducing the value of deductions for taxpayers above a threshold of $250,000 (indexed from 2009) of adjusted gross income; efforts to reduce the so-called “tax gap” through greatly expanded information reporting; new e-filing requirements for large organizations; repeal of the so-called “60-40” treatment for commodities traders; changes to the calculation of the dividends-received deduction for life insurance company separate accounts; a new requirement applied to corporate-owned life insurance to adhere to the pro rata interest expense disallowance rule; and modifications to the estate and gift tax valuation rules are also proposed.
• Other upper income tax provisions would permit the reinstatement of the top tax brackets of 39.6% and 36% that were temporarily repealed by the Bush tax cuts earlier this decade; phase out the personal exemption for incomes over $250,000 (married) and re-impose the former 20% tax rate on capital gains for taxpayers with incomes over $250,000.

For a full listing of the Administration’s “Green Book” proposals please search on this link:
www.treas.gov/offices/tax-policy/library/grnbk09.pdf

Our observations: Early signs are that the Senate will take up health care reform as early as June in the Senate Finance and HELP committees. The House will likely take up an energy bill, including taxes, during the same timeframe in both the Energy and Commerce and Ways & Means Committees. There is a good deal of momentum behind the idea of enacting health care reform this year, although it is a monumental political and substantive task which has defeated similar efforts in the past. Another Administration priority which may have tax implications is climate change legislation potentially involving sales of federal emissions credit.

It is hard to imagine the Congress digesting such massive undertakings in a single session, let alone in one Congress. However, it is also clear that we are now in a new era with regard to revenue raising, potentially on a very large scale. We stand ready to assist clients in dealing with what is likely to be a complicated and confusing process in the months ahead.