Obama budget proposals: Advancing the tax reform debate?

While the Fiscal Year 2016 budget submitted to Congress this week by President Obama is unlikely to be enacted as proposed, I see it as a starting point for broader negotiations between the Administration and Congressional lawmakers who have called tax reform a top priority.

What does the budget propose?

The President’s budget proposals include business tax reforms that would lower the top US corporate tax rate to 28 percent, make permanent certain business tax provisions, provide benefits for small businesses, and impose a fee on large financial institutions. This year’s budget builds on the President’s 2012 framework for business tax reform by including more detailed proposals, but does not specify all of the base broadeners that would be needed to offset the cost of lowering the corporate tax rate.

Significant new international proposals in the President’s budget would impose a one-time mandatory 14-percent tax on previously untaxed foreign corporate income that would be used to fund transportation programs and a 19-percent minimum tax on future foreign income.

Individual tax reform proposals in the budget would increase the top rates on capital gains and dividend income for high income taxpayers, limit the ability to ‘step-up’ the basis of inherited property, limit the value of itemized deductions, and impose a minimum tax on higher incomes. Some revenue from these proposals would offset the cost of new ‘middle-class’ tax reforms, including provisions that would enhance child care, education, and retirement tax benefits.

Finding common ground

Although House Ways and Means Committee Chairman Paul Ryan (R-WI) rejected the budget’s individual tax increase proposals, calling them a ‘roadblock’ to tax reform, and Senate Finance Committee Chairman Orrin Hatch (R-UT) similarly objected to what he called a “spending spree propped up by massive new tax hikes,” I see signs that the President’s budget could spark a robust discussion about tax reform.

At a Ways and Means Committee hearing this week on the budget, Chairman Ryan set a positive tone by focusing on opportunities to find areas of common ground. In particular, Chairman Ryan credited the Obama administration with taking steps in the right direction on business tax reform, raising speculation that there may be an opportunity for reforming corporate taxes. Treasury Secretary Jack Lew was quick to note similarities between the President’s international minimum tax proposals and a reform plan offered last year by former Republican Ways and Means Chairman Dave Camp, albeit at higher rates than the Camp package.

Timing is everything

I see the budget’s tax reform proposals as an opening bid, not an expected outcome. This year, with Republicans in control of both the House and Senate, efforts to enact tax reform will need involvement from the administration. By providing greater details of his tax reform proposals, the President’s budget helps grow the momentum for action on tax reform this year.

I’ll be watching the Congressional tax-writing committees to see what actions they take to advance tax reform. I encourage you to stay engaged in the tax reform debate and begin to consider how the various proposals could impact your business.