In the aggregate, the budget generally reflects the spending limits established by the two-year budget agreement Congress reached early this year.
Categories of tax proposals
The tax proposals are presented in two different categories:
- General tax revisions, which are estimated to raise $1.05 trillion over the 10-year budget window
- Tax proposals to create a “Reserve for Long-Run Revenue-Neutral Tax Reform” which are estimated to raise $248 billion
The latter are separately stated “because the Administration believes these proposals should be enacted [separately] in the context of comprehensive business tax reform….” The former would be dedicated to deficit reduction.
General tax revisions
Many of the tax proposals in the FY 2015 budget are familiar, having been included in previous budgets.
For example, the president does not propose rate reduction as part of his limited tax reform plan for individual taxpayers. Rather, the budget includes familiar proposals to reduce the value of various tax expenditures to 28% and to impose a new “Fair Share Tax” on upper income taxpayers. The budget also proposes returning the estate, gift, and generation-skipping transfer (GST) tax parameters to 2009 levels.
This portion of the budget also contains incentives for job creation, clean energy, manufacturing, and investment in infrastructure.
- It proposes reforms to the treatment of financial institutions and products, and includes a financial crisis responsibility fee.
- It also contains proposal to reduce the tax gap and simplify the tax system.
As a part of the tax cuts relating to families and individuals, the FY 2015 budget includes a new proposal to expand the earned income tax credit (EITC), the details of which are set out in a separate release [PDF 541 KB].
The cost of the EITC expansion would be offset by dedicating long-standing budget proposals to tax the carried interests of managers of investment funds as ordinary income and to extend payroll taxes to distributions from certain pass-through entities that provide professional services.
Long-run revenue-neutral business tax reform
This portion of the budget contains familiar proposals such as those to:
- Enhance and make permanent the R&E credit
- Extend increased expensing for small business
- Permanently extend certain energy and employment credits
- Provide incentives to promote regional growth
On the revenue raising side, it would:
- Require certain derivatives to be marked to market
- Expand interest disallowance for corporate owned life insurance
- Eliminate fossil fuel preferences
- Repeal LIFO and LCOM tax accounting
- Modify the depreciation rules for corporate aircraft
A new proposal would modify the like-kind exchange rules for real property by limiting the deferred gain to $1 million.
The bulk of the revenue in this category comes from proposed changes to the taxation of international income. Changes proposed in previous budgets include current taxation of excess returns associated with transfers of intangibles offshore, determination of foreign tax credits on a pooling basis, and deferral of deductions for interest expense related to deferred foreign income.
New international tax proposals—accounting for $87 billion of the international tax revenue—include:
- Eliminating deductions for “excessive” interest
- Creating a new subpart F category for sales of digital goods and services
- Preventing avoidance of foreign base company sales income through manufacturing service arrangements
- Restricting the use of hybrid arrangements that create “stateless income”
Similar proposals are under consideration by the Organisation for Economic Co-Operation and Development (OECD) as part of its “Base Erosion and Profit Shifting” (BEPS) project.
The $248 billion in new business tax revenue is far short of the revenue that would be required to offset a reduction in the statutory corporate rate from 35% to 28%, as proposed in the President’s Framework for Business Tax Reform, released by the White House and Treasury in February 2012. The FY 2015 budget does not indicate the source of the additional revenue that might be used to reduce the corporate rate, although other sources are suggested in the President’s Framework.
The budget specifically notes that temporary revenue created by the transition to reform—about $150 billion—would not be available for rate reduction, but would instead be dedicated to the surface transportation trust fund for infrastructure projects.
The Treasury Department today released an accompanying 297-page explanation of the tax proposals of the budget—Treasury’s Green Book* [PDF 1.57 MB]—which describes those proposals in greater detail.
*General Explanation of the Administration’s Fiscal Year 2015 Revenue Proposals or “Green Book”
For more information, contact a tax professional with KPMG’s Washington National Tax:
Principal in Charge of KPMG’s Legislative and Regulatory Services