Obama's Last Budget Focuses on Medicare Tax, Business Reform

Obama's Last Budget Focuses on Medicare Tax, Business Reform

President Obama unveiled his fiscal 2017 budget February 9, including a plan to end the ability of high-income business owners to escape the 3.8 percent Medicare tax and a proposal to levy a new tax on crude oil.

President Obama unveiled his fiscal 2017 budget February 9, including a plan to end the ability of high-income business owners to escape the 3.8 percent Medicare tax and a proposal to levy a new tax on crude oil. The budget would reduce the deficit by $2.9 trillion over 10 years, with $955 billion of that from trimming tax preferences for high-income taxpayers. It also requests $12.28 billion for the IRS, an increase of $1.05 billion from Congress's appropriation of $11.23 billion in fiscal 2016, according to the White House. The budget lays out a plan to impose a $10.25-per-barrel tax on oil produced "to support critical infrastructure and climate resiliency needs." The administration also proposed to raise the threshold of the so-called Cadillac tax on high-cost healthcare plans in states where the premium for the "gold" level of coverage exceeds the tax's threshold. "This budget is not about looking back. It is about looking forward," Office of Management and Budget Director Shaun Donovan said at a press conference. "It's about choosing investments . . . that not only make us stronger today but enable us to make progress toward the kind of country that we aspire to be. The president is absolutely committed to using every minute of his last year to make such progress." Obama's last budget before he leaves office has generated less interest than usual, but Republicans have been quick to criticize it. Senate Finance Committee Chair Orrin G. Hatch, R-Utah, said in a statement that the administration's tax increase "to prop up more government spending will only drag" down the economy, while House Ways and Means Committee Chair Kevin Brady, R-Texas, said in a release that Obama's final budget was about "promoting his liberal legacy instead of securing America's financial future." The administration's plan includes about 145 separate tax proposals, of which 115 were part of the fiscal 2016 budget proposal, a senior Treasury official said during a briefing with reporters. Seventeen proposals, including the expanded EITC and the child tax credit and the extension of the research credit were enacted into law completely or almost entirely last year. Obama's budget also includes new proposals to close loopholes in the Self-Employment Contributions Act (SECA) taxes and the net investment income tax, create a new tax credit for hiring from community and technical colleges, and allow unaffiliated employers to join a single multiple employer defined contribution plan. The administration's budget retains the international tax provisions from previous years' budgets, including a 19 percent global minimum tax on U.S. companies' future foreign earnings and a 14 percent deemed repatriation rate on already accumulated foreign earnings. Obama has dramatically expanded the scope of a proposal first unveiled in his fiscal 2015 budget plan to make it harder for business owners who materially participate in their businesses to avoid fully contributing to the cost of Medicare. According to the green book, Treasury became aware that some owners of passthrough businesses have been able to avoid imposition of both the 3.8 percent <a href="/lr/resolve//cq07" class="frllink">section 1411</a> net investment income tax imposed on capital income and the 3.8 percent Medicare portions of the SECA taxes imposed on wage income. For 2015, any self-employment earnings over $118,500 aren't subject to Social Security tax, but are still subject to the base 2.9 percent Medicare tax (<a href="/lr/resolve//cplk#cplk-0000004" class="frllink">section 1401(b)(1)</a>). Earnings over $250,000 are also subject to the additional 0.9 percent Medicare tax (<a href="/lr/resolve//cplk#cplk-0000005" class="frllink">section 1401(b)(2)</a>), for a total hospital insurance tax of 3.8 percent. The second part of the proposal has not changed much since it was first proposed in 2014. It essentially amends the code so that the <a href="/lr/resolve//cpld#cpld-0000027" class="frllink">section 1402(a)(13)</a> self-employment tax exemption doesn't apply in the SECA context. Owners who materially participate in the trade or business of a professional service business -- which includes, among other things, partnerships like hedge funds that are substantially involved in providing investment advice or management -- will be subject to SECA taxes on their distributive shares of business income, subject to the current exemptions. While the previous version of the proposal focused on SECA taxes and was estimated to bring in $74.6 billion over 10 years, the expanded version -- described as a rationalization of the NII and SECA tax regimes -- could bring in more than 3-1/2 times that -- $271.7 billion over 10 years. The proposed $10.25 tax per barrel on domestic and imported crude oil would be phased in over five years. Exported petroleum products would be excluded. The proposal would raise about $319 billion over a 10-year period, according to the green book. Unlike in previous years, the fiscal 2017 budget doesn't wall off the proposals it believes should be part of an effort to reform the taxation of business entities but includes them and their revenue in the larger budget without a corresponding line item for reducing the top corporate income tax rate. The move could be viewed as an implicit admission that Obama's 2012 business tax reform framework, which called for revenue-neutral base broadening resulting in a top corporate income tax rate of 28 percent, is dead. But at the briefing, the Treasury official insisted that "the administration is still committed to business tax reform." Treasury has never come close to identifying enough base broadeners to pay for the significant rate reduction (a 1 percentage point reduction in the federal corporate income tax rate, which now tops out at 35 percent, costs about $110 billion over 10 years). In fiscal 2015, the business reserve proposals generated $248.3 billion, while in fiscal 2016, they only generated $141.5 billion.

President Obama unveiled his fiscal 2017 budget February 9, including a plan to end the ability of high-income business owners to escape the 3.8 percent Medicare tax and a proposal to levy a new tax on crude oil. The budget would reduce the deficit by $2.9 trillion over 10 years, with $955 billion of that from trimming tax preferences for high-income taxpayers. It also requests $12.28 billion for the IRS, an increase of $1.05 billion from Congress's appropriation of $11.23 billion in fiscal 2016, according to the White House. The budget lays out a plan to impose a $10.25-per-barrel tax on oil produced "to support critical infrastructure and climate resiliency needs." The administration also proposed to raise the threshold of the so-called Cadillac tax on high-cost healthcare plans in states where the premium for the "gold" level of coverage exceeds the tax's threshold. "This budget is not about looking back. It is about looking forward," Office of Management and Budget Director Shaun Donovan said at a press conference. "It's about choosing investments . . . that not only make us stronger today but enable us to make progress toward the kind of country that we aspire to be. The president is absolutely committed to using every minute of his last year to make such progress." Obama's last budget before he leaves office has generated less interest than usual, but Republicans have been quick to criticize it. Senate Finance Committee Chair Orrin G. Hatch, R-Utah, said in a statement that the administration's tax increase "to prop up more government spending will only drag" down the economy, while House Ways and Means Committee Chair Kevin Brady, R-Texas, said in a release that Obama's final budget was about "promoting his liberal legacy instead of securing America's financial future." The administration's plan includes about 145 separate tax proposals, of which 115 were part of the fiscal 2016 budget proposal, a senior Treasury official said during a briefing with reporters. Seventeen proposals, including the expanded EITC and the child tax credit and the extension of the research credit were enacted into law completely or almost entirely last year. Obama's budget also includes new proposals to close loopholes in the Self-Employment Contributions Act (SECA) taxes and the net investment income tax, create a new tax credit for hiring from community and technical colleges, and allow unaffiliated employers to join a single multiple employer defined contribution plan. The administration's budget retains the international tax provisions from previous years' budgets, including a 19 percent global minimum tax on U.S. companies' future foreign earnings and a 14 percent deemed repatriation rate on already accumulated foreign earnings. Obama has dramatically expanded the scope of a proposal first unveiled in his fiscal 2015 budget plan to make it harder for business owners who materially participate in their businesses to avoid fully contributing to the cost of Medicare. According to the green book, Treasury became aware that some owners of passthrough businesses have been able to avoid imposition of both the 3.8 percent section 1411 net investment income tax imposed on capital income and the 3.8 percent Medicare portions of the SECA taxes imposed on wage income. For 2015, any self-employment earnings over $118,500 aren't subject to Social Security tax, but are still subject to the base 2.9 percent Medicare tax (section 1401(b)(1)). Earnings over $250,000 are also subject to the additional 0.9 percent Medicare tax (section 1401(b)(2)), for a total hospital insurance tax of 3.8 percent. The second part of the proposal has not changed much since it was first proposed in 2014. It essentially amends the code so that the section 1402(a)(13) self-employment tax exemption doesn't apply in the SECA context. Owners who materially participate in the trade or business of a professional service business -- which includes, among other things, partnerships like hedge funds that are substantially involved in providing investment advice or management -- will be subject to SECA taxes on their distributive shares of business income, subject to the current exemptions. While the previous version of the proposal focused on SECA taxes and was estimated to bring in $74.6 billion over 10 years, the expanded version -- described as a rationalization of the NII and SECA tax regimes -- could bring in more than 3-1/2 times that -- $271.7 billion over 10 years. The proposed $10.25 tax per barrel on domestic and imported crude oil would be phased in over five years. Exported petroleum products would be excluded. The proposal would raise about $319 billion over a 10-year period, according to the green book. Unlike in previous years, the fiscal 2017 budget doesn't wall off the proposals it believes should be part of an effort to reform the taxation of business entities but includes them and their revenue in the larger budget without a corresponding line item for reducing the top corporate income tax rate. The move could be viewed as an implicit admission that Obama's 2012 business tax reform framework, which called for revenue-neutral base broadening resulting in a top corporate income tax rate of 28 percent, is dead. But at the briefing, the Treasury official insisted that "the administration is still committed to business tax reform." Treasury has never come close to identifying enough base broadeners to pay for the significant rate reduction (a 1 percentage point reduction in the federal corporate income tax rate, which now tops out at 35 percent, costs about $110 billion over 10 years). In fiscal 2015, the business reserve proposals generated $248.3 billion, while in fiscal 2016, they only generated $141.5 billion.

Section 32 -- Earned Income Credit

Section 179 -- Expensing Business Assets

Section 4980I -- Insurance Excise Tax

Section 7704 -- Publicly Traded Partnerships

Section 810 -- Operations Loss Deduction

Section 1032 -- Stock for Property

United States

Budgets

Corporate taxation

Credits

Healthcare taxation

Insurance

Tax policy

Tax Notes, Feb. 15, 2016, p. 756

150 Tax Notes 756 (Feb. 15, 2016)

Kaustuv Basu

Amy S. Elliott

Kat Lucero

Matthew R. Madara

David van den Berg

Tax Analysts

Doc 2016-2778

2016 TNT 27-1

Basu, Kaustuv

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Amy S. Elliott is a contributing editor at Tax Analysts. Since joining the organization in 2008, Elliott has written primarily on developments in corporate and partnership taxation. Previously Elliott worked in communications for the Episcopal Diocese of Washington and J-Lab: The Institute for Interactive Journalism. She received her BA in journalism from the University of Maryland in 2002 and her JD from the George Washington University Law School in 2008. Elliott is admitted to practice in the District of Columbia and Maryland.
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Elliott, Amy S.

Lucero, Kat

Madara, Matthew R.

van den Berg, David

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Obama's Last Budget Focuses on Medicare Tax, Business Reform