Revenue Provisions in the President's Budget

Apr 17, 2013 | Taxes

For the first time in a few days, Tax Day did actually fall on April 15, so hopefully the tax procrastinators out there were able to get their filing done. Filing your taxes provides a good reminder of how complicated the current code is. With the President's budget coming out, we'll take a look at how it would change the tax code.

Under the budget released last week, revenues are projected to rise from 16.7 percent of GDP in 2013 and 17.8 percent in 2014 to 18.9 percent in 2018 and 20 percent by 2023. Much of this increase is already assumed under the Administration’s baseline, due to a recovering economy, tax increases included in the Affordable Care Act and the revenue increases that were part of the American Taxpayer Relief Act, which together account for the rise of revenues to 19.4 percent of GDP by 2023. An additional 0.6 percentage points in 2023 comes from the net revenue increases proposed in the President’s budget.

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Source: OMB, CBO

As we mentioned before, the budget is split out into two separate sections. The first section reflects the latest White House offer made during the fiscal cliff negotiations, and the budget lays out two revenue provisions, both pretty familiar ones, to hit the desired target. The first is a proposal to limit the amount of deductions and exclusions that earners in the top three tax brackets can reduce their tax liability, limiting to 28 percent of the value of those preferences. The Administration would also institute the so-called “Buffett Rule” requiring that millionaires pay no less than 30 percent of their income (after charitable contributions) in taxes. The Administration estimates that these two measures would combine to raise $583 billion over the next ten years. Adding in the revenue portion of the chained CPI, which is part of the offer, raises the total to $683 billion.

Outside of the offer, the budget includes a number of provisions that have appeared in past budgets. In terms of tax cuts, the budget extends the 2009 refundable credit expansions ($161 billion), expands the child and dependent care credit ($9 billion), and enacts a temporary tax credit for employers who add to their payroll ($25 billion), among a few other things. Tax increases include setting the estate tax back to 2009 parameters ($72 billion), enacting a fee on large banks ($59 billion), and taxing carried interest as ordinary income ($16 billion).

Revenue Provisions in the President's Budget (billions)
Provision2014-2023 Revenue Impact
28 Percent Limit on Certain Tax Preferences$529
Buffett Rule (Fair Share Tax)*$53
Chained CPI Revenue$100
Subtotal, December Offer$683
  
2009 Refundable Credit Expansions-$161
  
Business/Infrastructure Tax Cuts-$50
Individual Tax Cuts-$29
Estate and Gift Tax Provisions$79
Financial Crisis Responsibility Fee$59
Other Revenue Increases$90
Subtotal, Other Revenue$149
  
Manufacturing/Research/Energy Provisions-$142
Small Business/Regional Provisions-$99
International Tax Reforms$157
Financial Product Reforms$31
Fossil Fuel Preference Repeal$41
LIFO Repeal$81
Other Revenue$23
Unspecified Rate Reductions/Other Tax Cuts-$146
Subtotal, Business Tax Reform$0
  
Total$670

Source: OMB
Note: Some revenue estimates may include effects on outlays. Conversely, some policies with revenue effects that OMB lists as spending provisions are not included.
*By itself, the Buffett Rule would raise $99 billion. Due to interaction with the 28 percent limit, it only raises $53 billion.

One departure from last year's budget is that many business-related provisions, both tax cuts and tax increases, are thrown into a deficit-neutral reserve fund for business tax reform. Some of the tax cuts include extensions of the R&E credit, renewable energy credits, and a number of small business preferences. The tax increases include changes to the international tax system, the elimination of fossil fuel preferences, financial product reforms, and repeal of the last-in first-out (LIFO) inventory accounting method. Overall, these changes raise net revenue of $145 billion over ten years, which would be used to offset the cost of rate reductions or other revenue-decreasing policies.

Tax reform, and tax expenditure reductions in particular, may be the key to a debt deal. The President's budget has laid out many ideas that will contribute to the debate.

Click here to see the other blogs we have done on the President's budget.