Budget Documents Reflect President Obama's Fiscal and Election Year Priorities
On Monday, February 13, 2011, US President Barack Obama released the Administration's proposed budget for the October 1, 2011 - September 30, 2012 fiscal year (the "President's FY 2013 Budget"). While the President's Budget is effectively a blueprint for the next fiscal year, it also offers an early glimpse of the President's key priorities for both tax policy and government spending, and sets the stage for the President's reelection themes. Ultimately, any budget proposals from the Administration must traverse the Congressional gauntlet, where at present Members remain mired in negotiations to extend the payroll tax reduction, unemployment insurance, and Medicare physician reimbursement rates, all of which expire later this month.
A clear picture of the President's election year priorities emerges from the President's FY 2013 Budget, particularly in the arena of tax policy, where the President has again focused on increases for upper-income taxpayers, balanced with additional discretionary spending reductions. Despite this balance, the proposed budget would nevertheless incur deficits of $11 trillion over the 10-year budget window (through 2022). Key themes highlighted as a part of the President's reelection strategy in this budget include: making the middle class more secure, adopting spending programs that he considers to be "investments" in the future or that create jobs now, and "reforming" the tax code in five key criteria outlined in the budget.
The following provides an outline of some of the key priorities contained in the President's budget for several critical departments and agencies, as well as proposed tax changes and assumptions on which the budget proposal is based.
Overview
Due to its slow roll-out, the President's FY 2013 Budget contains few surprises, and is generally consistent with the proposals President Obama made last year to the Joint Select Committee on Deficit Reduction and reflects the ideas and themes he described in his State of the Union speech in January.
In its release, the Obama Administration highlighted the following features:
- A reduction in discretionary spending from 8.7% of GDP in 2011 to 5% in 2022
- Over $350 billion in short-term measures for job growth, such as extension through 2012 of the temporary payroll tax reduction and unemployment insurance
- Specific incentives for education, innovation, and manufacturing
- Improvements to infrastructure (including surface transportation and wireless broadband network)
- A variety of revenue-raising provisions, primarily targeted at upper-income individuals, international businesses, and large financial institutions, and savings in health programs (including Medicare and Medicaid) and other entitlement programs (including agriculture, federal employee retirement, and PBGC)
- A projected 2012 budget deficit of $1.33 trillion (8.5% of GDP), falling to $575 billion (2.7% of GDP) in 2018
Direct Agency Spending
The President's FY 2013 Budget provides for $3.8 trillion in spending. That spending package includes a number of key initiatives (as well as proposed programmatic cuts) across agencies, including:
Department of Defense – FY 2013 Request: $525.4 billion / FY 2011 Enacted: $528.2 billion
Spending
- $176 billion for overall training and readiness
- $48.7 billion for Military Health System
- $9.8 billion for weapons systems such as: unmanned air surveillance, upgraded tactical vehicles and Virginia class marine submarine
- 1.7 percent pay increase for service members
Cuts
- A new TRICARE initiative reform which will reduce the cost of military healthcare by reducing the costs by $12.9 billion in the next five years
- Acquisition reform to reduce high-risk contracts
Department of Energy – FY 2013 Request: $27.2 billion/ FY 2011 Enacted: $25.6 billion
Spending
- $2.3 billion for research and development to the Office of Energy Efficiency and Renewable Energy including: $310 million for solar, $95 million for wind, $65 million for geothermal, $770 million for nuclear
- $12 million this year to fund multi-year research initiative for advancing technology and safety methods for natural gas
- $290 million to expand research and development on manufacturing processes that save energy
- $5 billion to continue scientific research and development
- $7.6 billion for Weapons Activities for a nuclear deterrent strategy
Department of the Treasury – FY 2013 Request: $14 billion/ FY 2011 Enacted: $13.4 billion
Spending
- $7.6 billion on FHA Hardest Hit program which helps eligible states to implement innovative housing programs
- $12.8 billion to the IRS
Cuts
- $100 million cut in overhead administrative costs to the Treasury Department
- $75 million in savings by modernizing the US currency, allowing the Secretary to change the composition of the coin currency to more cost effective materials
Department of Housing and Urban Development - FY 2013 Request: $48 billion / FY 2011 Enacted: $57 billion
Spending
- $150 million to continue investments in high-poverty neighborhoods where distressed HUD-assisted publicly and privately owned housing is located
- $1 billion to capitalize the Housing Trust Fund to increase the amount of hosing target towards low-income families
- $50 million to pilot an expansion of the Jobs-Plus demonstration to increase employment opportunities for Public Hosing residents
Cuts
- $640 million reduction in Project-Based Rental Assistance
- $40 million decrease in funding for the Federal Housing Administration
Tax Proposals
Most of the tax proposals in the President's FY 2013 Budget were previewed by President Obama in his State of the Union speech or else previously submitted by him to Congress. Nonetheless, the budget contains a few new measures and some modifications of previous proposals.
More Detail on Proposals Outlined in the State of the Union Speech
In his State of the Union speech, President Obama highlighted several tax proposals, and the President's FY 2013 Budget provides a little more detail on these proposals, including
- One-year extension of the temporary 2.0 percentage point payroll tax reduction and 100% expensing for equipment and other "qualified property"
- A temporary 10% tax credit for new hires and higher wages (the proposal, which is capped at $500,000 per employer, appears to be in lieu of the Administration's small employer "payroll tax holiday" in last year's American Jobs Act that never caught on)
- Incentives for manufacturing
-
- Extension and expansion of the qualified advanced energy manufacturing credit
- a 20% tax credit for expenses incurred in connection with "insourcing" a US trade or business
- $2 billion in annual authority to distribute tax credits in 2012-2014 to support "qualified investments" in communities affected by military base closures or mass lay-offs
- expansion of the domestic production activities deduction, especially for certain advanced technology property
- Temporary incentives to create jobs (especially in "green" industries) or promote regional growth
- Activities singled out for punishment:
-
- Outsourcing: Companies that reduce or eliminate a trade or business or line of business currently conducted in the US and, at the same time, expand that same trade or business outside the US will not be able to deduct expenses incurred in connection with the relocation of that business (although disallowed expenses do not include capital expenditures or costs for severance pay or other assistance to displaced workers)
- Production of oil, gas, coal, and other hard mineral fossil fuels and "certain other nonmanufacturing activities" would not be eligible for the domestic production activities deduction (this disallowance would be used to "pay" for the expansion of the deduction described above for other taxpayers)
Proposals described in the President's State of the Union speech, but not included as specific proposals in the President's FY 2013 Budget
- The proposal to require all US companies pay a "minimum tax on their overseas profits"
- The "Buffet" rule (i.e., the imposition of a minimum income tax rate of 30% on taxpayers who earn more than $1 million)
- The proposal to eliminate tax deductions for taxpayers with incomes in excess of $1 million
- Comprehensive tax reform: Although the President's FY 2013 Budget calls for tax reform, it refers only to the need to follow the same five principles that President Obama has stated in previous submissions to Congress. The Administration has stated, however, that a corporate tax reform proposal will be released later in February.
New and Modified Proposals
Because the budget explanations are very general, not all modifications to previous proposals are apparent. Although the President's FY 2013 Budget generally presented few surprises, one unexpected modification is to the taxation of dividends for upper-income individuals. Unlike previous budget proposals, where dividends would have remained subject to the same tax rate as capital gains (albeit rising to 20% for upper-income individuals), the President's FY 2013 Budget would tax dividends received by upper-income individuals as ordinary income, nearly trebling the current rate for some taxpayers. There are also several new revenue raisers in the budget. They are generally highly technical, and most are directed at partnerships, US businesses operating outside the US, and foreign persons investing in the US. In addition, several expiring or expired tax provisions would be expanded and extended.
Repeats from last year's budget (or previous submissions)
The 2013 Budget would extend a portion of the so-called "Bush tax cuts" (as in prior budgets, the extension of the income, dividend, and capital gains tax rates would be limited to those taxpayers with incomes below $250,000). The estate tax rules in effect in 2009 would be enacted permanently in conjunction with the adoption of several additional estate and gift tax revenue raisers.
Significant revenue-losing provisions include
- Permanent extension of the research and experimentation tax credit (with an increase in the alternative simplified research credit rate)
- Permanent extension of the small business capital gains exemption
- Permanent extension of the American Opportunity Tax Credit
- One-year extension of most other expired or expiring provisions (generally only those related to the production of fossil fuels would be allowed to expire)
Practically all revenue raisers from last year's budget (or previous submissions) that were not enacted are included in this year's budget. These include proposals to
- "Reform" the treatment of financial institutions and products, including the financial crisis responsibility fee (or "bank tax") which is intended to raise more revenue than last year's budget proposal
- Reinstate Superfund taxes
- Increase Oil Spill Liability Trust Fund taxes
- Make the unemployment insurance surtax permanent
- Repeal the LIFO method of accounting
- Repeal the lower-of-cost-or-market inventory accounting method
- Eliminate special depreciation rules for corporate jets
- Repeal gain limitation for dividends received in reorganization exchanges
- Adopt so-called US international tax "reforms" (including several new provisions)
- "Reform" treatment of insurance companies and products
- Eliminate fossil fuel tax preferences
- Adopt a "carried interest" proposal
- Deny a deduction for punitive damages
- Limit itemized deductions for upper-income individuals
- Expand information reporting, improve compliance, and strengthen tax administration
Next Steps
This budget release occurs in the context of significant uncertainty in the short-term and long-term revenue outlook, given the yet undecided outcome over the Congressional debate on tax policy. Specifically, in addition to the debate over extension of the temporary payroll tax reduction, there remain a substantial number of tax provisions that have expired or that are expiring at the end of this calendar year. These include the 2001 and 2003 tax cuts for individuals (the "Bush tax cuts"), as well as a series of other tax extenders and credits that were given new life for a two year period in 2010. Moreover, large reductions in discretionary spending will occur automatically as a result of the Budget Control Act sequestration. Accordingly, failure by Congress and the President to agree to a tax and budgetary plan in 2012 will result in outcomes that neither Democrats or Republicans want to see or to be blamed for.
Under the normal process, the House and Senate Budget Committees would each produce budget resolutions, which are the spending and tax blueprints for the fiscal year, with both the House and Senate adopting budget resolutions preferably in April. The Republican-controlled House and the Democratic-controlled Senate would then seek to agree to a compromise budget resolution. Being only blueprints, the budget resolutions lack the force and effect of law, and the President cannot veto a budget resolution.
Once a budget blueprint is established, the House and Senate Appropriations Committees will begin to develop appropriations bills that implement the spending levels in the budget resolution. The mandatory spending (i.e., entitlements, such as Medicare and Medicaid) changes identified in the budget resolution will be considered by the House and Senate committees of jurisdiction. Finally, the House Ways and Means Committee and the Senate Finance Committee will begin to develop the tax legislation outlined in the budget resolution.
Congress has been unable to follow this regular process for several years, resulting in last-minute tax bills in December and omnibus appropriations bills. For this reason, many observers expect much of the tax and spending decisions to be postponed by the President and Congress until a "lame duck" session following the November election. Depending on the outcome of the elections, however, a lame duck session could prove even more contentious than the pre-election sessions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
