On September 19, the President submitted to Congress his 80-page blueprint for jobs growth and long-term deficit reduction. The plan combines short-term, mainly payroll-tax-oriented jobs stimulus provisions, overhauls to major entitlement programs, and a tax reform package featuring tax increases for wealthier individuals along with some tax crackdowns for business and revisions to the U.S.-international tax regime.
Although the President’s plan stands little chance of being adopted as-is, it thrusts the subject of tax reform squarely into the center of the upcoming election battle, and parts of the plan may well be adopted.
We have outlined the major tax provisions of this proposal. We believe that this blueprint will provide us with most of the tax talking points and potential legislation through the end of the year.
The President’s “Plan for Economic Growth and Deficit Reduction” includes the tax provisions carried in the “American Jobs Act of 2011,” which was presented to Congress earlier this month. Businesses would be the major beneficiaries of these tax provisions, which would:
- Extend through 2012 the 100% bonus first-year depreciation deduction that generally applies only for assets placed in service before 2012 under current law.
- Cut the employer portion of the Social Security tax (Old Age, Survivors and Disability Insurance, or OASDI, tax) for employers in half from 6.2% to 3.1% on the first $5 million in wages paid by all employers, private or public (but not for government workers or household help). That would work out to a maximum reduction of $155,000.
- For the last quarter of 2011 and for calendar year 2012, create a payroll tax credit that fully offsets the employer Social Security tax that otherwise would apply to increases in wages from the corresponding period of the prior year. For example, if an employer paid wages subject to Social Security tax of $5 million in 2011 and $6 million in 2012, the credit to which the employer would be entitled would eliminate the employer’s portion of Social Security taxes on the $1 million of increased wages. The credit would be available on up to $50 million of an employer’s increased wages.
- Under the work opportunity tax credit, which under current law applies only to qualifying hires before 2012, employers that hire veterans who have been unemployed for at least 6 months and have a service-connected disability are eligible for a maximum tax credit of $4,800. The proposal would create an enhanced incentive for hiring returning service members. It would create a new “Returning Heroes Tax Credit” of up to $4,800 for unemployed veterans, and a “Wounded Warriors Tax Credit” of up to $9,600 that would increase the existing tax credit for firms that hire unemployed veterans with service-connected disabilities.
- Create a tax credit of up to $4,000 for hiring workers who have been looking for a job for over six months.
The sole tax relief proposal for individuals consists of cutting Social Security taxes in half in 2012 for workers, from 6.2% to 3.1%, thereby providing a tax cut of roughly $1,500 “to the typical family earning $50,000 a year.”
Comprehensive Tax Reform
The President’s “Plan for Economic Growth and Deficit Reduction” exhorts Congress to adopt a fairer and simpler tax code, offering ideas for individuals, businesses, and international tax.
Tax changes for individuals. The President’s plan calls for:
- The expiration of the 2001 and 2003 (EGTRRA and JGTRRA) tax cuts for those with household income over $250,000 a year, effective after 2012.
- A rollback of the estate tax exemption and rates to 2009 levels.
- Limit the tax rate at which high-income taxpayers can reduce their tax liability to a maximum of 28%, affecting only married taxpayers filing a joint return with income over $250,000 (at 2009 levels) and single taxpayers with income over $200,000. This limit would apply to: all itemized deductions; foreign excluded income; tax-exempt interest; employer sponsored health insurance; and selected above-the-line deductions.
- Under the so-called Buffet rule, no household making over $1 million annually would pay a smaller share of its income in taxes than middle-class families pay.
- Certain “carried interest” to be taxed as ordinary income.
Tax changes for business. The proposals for business mostly are derived from earlier proposals, but there are new suggestions as well.
- Repeal the use of the last-in, first-out (LIFO) accounting method, for tax years beginning after 2012.
- Bar use of the lower-of-cost-or market and subnormal goods methods of inventory accounting, which currently allow certain taxpayers to take cost-of-goods-sold deductions on certain merchandise before the merchandise is sold.
- Require corporate business jets to be depreciated over seven years instead of five, effective for tax years beginning after 2012.
- The net federal unemployment insurance tax on employers, which dropped from 0.8% to 0.6% for wages paid after June 30, 2011, would permanently revert to 0.8%, retroactively effective as of June 30, 2011.
- Permit IRS to issue generally applicable guidance about the proper classification of workers and to require prospective reclassification of workers who are currently misclassified.
- Tighten the foreign tax credit rules that apply to taxpayers that are subject to a foreign levy and that also receive (directly or indirectly) a specific economic benefit from the levying country (so-called “dual capacity” taxpayers).
- Eliminate tax preferences for oil and gas companies.
- Eliminate tax preferences for coal activities beginning in 2013.
- Expand information reporting on the sale of life insurance contracts and the payment of death benefits on contracts that were sold.
- Modify the dividends-received deduction (DRD) for life insurance companies.
International tax. There are five proposals for reforming the U.S. international tax system:
- Defer the deduction of interest expense properly allocated and apportioned to a taxpayer’s foreign-source income that is not currently subject to U.S. tax until such income is subject to U.S. tax.
- Require a taxpayer to determine foreign tax credits from the receipt of a dividend from a foreign subsidiary on a consolidated basis for all its foreign subsidiaries. Foreign tax credits from the receipt of a dividend from a foreign subsidiary would be based on the consolidated earnings and profits and foreign taxes of all the taxpayer’s foreign subsidiaries.
- Provide that if a U.S parent transfers an intangible to a controlled foreign corporation (CFC) in circumstances that demonstrate excessive income shifting from the U.S., then an amount equal to the excessive return would be treated as subpart F income.
- Clarify the definition of intangible property for purposes of the special rules relating to transfers of intangibles by a U.S. person.
- Amend the rules that limit the deductibility of interest paid to related persons subject to low or no U.S. tax on that interest to prevent inverted companies from using foreign-related party and certain guaranteed debt to inappropriately reduce the U.S. tax on income earned from their U.S. operations.
Please remember that none of the above items are currently law. This is merely President Obama’s proposal. We do not believe that the majority of these items will actually become law.
If you have any questions regarding this proposal or our opinions on future tax polcy, please do not hesitate to contact us.