Where taxes are headed
Obama and lawmakers aim to raise revenue and simplify the system. How much they'll get done is far from clear. But they're planting seeds.
NEW YORK (CNNMoney.com) -- Changing tax policies is always fraught with political and economic risk. Never more so than now, given the country's deep fiscal hole and competing theories on how best to aid economic recovery.
Nevertheless, President Obama and the congressional tax-writing committees are moving ahead with a laundry list of potential tax changes.
Plus the administration is creating a tax reform task force charged with proposing ways to raise revenue while not hiking taxes on families making less than $250,000.
The group will report back to the president by Dec. 4. That end-of-year deadline is one reason why policy experts don't expect lawmakers to pass major tax legislation until 2010.
But the debates -- and lobbying -- over the content of that legislation will begin in earnest this year.
So will the handicapping.
"If the economy next year is worse than it is now, I've got to believe they're going to say maybe we ought to put off this tax stuff by another year or so," said Ken Kies, managing director of the Federal Policy Group, a tax lobbyist working on behalf of businesses and trade associations.
How much lawmakers ultimately accomplish isn't clear yet. But they are considering some significant changes.
One revenue raising idea is a reform of the deferral rule for U.S.-based multinationals. Currently, a U.S.-based company doesn't need to pay income tax on its foreign subsidiaries' profits unless and until the money is brought back to U.S. shores.
The provision makes it more attractive for companies to invest in countries with lower tax rates.
"Obama is serious about going after deferral," said Anne Mathias, director of research at Concept Capital.
The administration has said it wants to make a change but has yet to propose any specifics.
One idea discussed by lawmakers is to eliminate the deferral option so companies have to pay tax on their overseas profits when earned.
"The government doesn't want to subsidize U.S. companies to invest overseas," said tax policy expert Eric Toder, a senior fellow at the Urban Institute.
Another idea is to preserve the deferral option but prohibit companies that use it from deducting expenses incurred to support their overseas operations until they bring their profits back to U.S. shores.
The deduction measure would be "unwieldy," Mathias said. It would be hard for companies to separate deductible expenses from non-deductible ones when they stem from the same personnel or systems used to support U.S.-based and offshore operations. "It's simpler to just take away the deferral," she said.
Already corporations are lining up lobbyists to shoot down the idea. Kies, who served as the head of the Joint Committee on Taxation when Republicans controlled Congress, is one of them.
"This isn't a theory. We've tried this before and it ended disastrously," he said.
Kies noted that between 1986 and 2004, U.S.-based international shippers were denied deferral. The number of U.S.-based shippers shrank. When Congress reinstated deferral in 2004, the tax was cited as a cause of the decline for the U.S. shipping industry.
In other efforts to tax U.S. money abroad, Congress is trying to crack down on offshore tax havens, increasing enforcement both against the individuals who shelter their money in other countries and the banks that help them do so.
Obama has proposed making permanent the income tax cuts put into place during the Bush administration for couples making less than $250,000 and for single filers making less than $200,000.
Senate Finance Chairman Max Baucus, D-Mont., has introduced legislation that would do just that.
On the other side of the debate are some tax experts and federal deficit hawks who worry about the effects tax cut permanency on the country's revenue and debt levels.
The Tax Policy Center estimates extending the cuts for middle and lower income families would reduce revenue by more than $2 trillion over 10 years relative to current law, which assumes the tax cuts would expire by 2011.
As things stand now, it would pay off mightily for heirs if their relatives die in 2010 -- the estate tax is slated to expire for that year and that year only. Come 2011, it's scheduled to revert to its 2001 level, where only the first $1 million of an estate would be exempt from the tax and the taxable portion of the estate would be taxed at rates up to 55%.
Obama has called for the estate tax to be made permanent at its 2009 levels adjusted for inflation going forward. That would mean the first $3.5 million of one's estate would be exempt from estate tax and taxable portions of the estate would be taxed at rates no higher than 45%.
Baucus included the provision in legislation he introduced last week.
Kies expects that lawmakers may pass a one-year extension of the 2009 estate tax parameters for 2010, and then include a more permanent extension in a broader piece of tax legislation next year.
The Tax Policy Center estimates making the 2009 levels permanent would reduce revenue by more than $300 billion over 10 years.
Health reform is one of the administration's leading agenda items that lawmakers are likely to take up in earnest this year. But many legislators favor paying for Obama's health reserve fund by limiting the tax break that employees receive when they buy their health insurance through work.
Right now the portion of premiums paid by employers is treated as tax-free compensation. And there is no limit on how much employers may contribute.
Lawmakers are considering capping the amount that would be treated as tax free.
The president's 2010 budget calls for a portion of the profits paid to managers of hedge funds and private-equity funds to be taxed as ordinary income rather than as an investment gain. In other words, it would be subject to a much higher tax rate than the 15% long-term capital gains rate that the managers have been paying.
The administration estimated the provision could raise $24 billion over 10 years.
But the top tax writers in the Senate -- Baucus and Charles Grassley, R-Iowa -- indicated last week that change may not be coming in the near term.
"Private equity interests, I'm told, are not going to be paid in carried interest for the next several years," Baucus said, noting that it's less of an issue than it was when the money was flowing like water, according to Congress Daily.
But he allowed for the possibility that the proposal will be "in the mix" when international tax reform is considered in 2010.
The new tax credit for middle and low-income families, worth up to $400 per worker ($800 per working couple) is in place for 2009 and 2010.
The president proposed in his budget to make it permanent, but as of right now the idea is not likely to make it into lawmakers' budget resolution. That doesn't mean, however, it won't make it into future tax bills.