I got a glimpse of the 2011 budget proposal on the news last night. It’s big. As in big thick book big.
And I will admit to not having read all 192 pages yet. But I’m making progress. You can download the whole thing at once – or in little bits (as I have done) – by visiting the White House’s web site.
While there’s a lot in the budget to digest, I’m going to focus on Obama’s tax proposals, which I have reviewed. You’ll see some of the same themes that were mentioned in last week’s State of the Union address. My more editorial comments/predictions are in red.
First, the revenue-raisers:
As expected, Obama has proposed letting the 2001 and 2003 Bush tax cuts expire for upper-income households. The legislation currently on the books did not make the cuts permanent so basically, if Congress does nothing, the cuts will expire. Obama wants to allow the tax cuts to expire for high-income households, meaning $200,000 for individual taxpayers and $250,000 for those married taxpayers filing jointly.
So what does this mean from a practical standpoint? First, the top tax rates are going back up to the 2001 levels: the 33% tax bracket would increase to 36% and the 35% bracket would increase to 39.6%. The 36% bracket will kick in at about $231,000 for married filers and $190,000 for single filers. The 39.6% bracket will likely kick in at $372,000. Next, phaseouts would be reinstated for personal exemptions and itemized deductions (the so-called “Pease” and “PEP” options that I mentioned in the Tax Foundation podcast) for the two highest brackets. The real result of this provision is that eligibility in the top brackets for exemption-related breaks will be dramatically reduced. Additionally, rates for long term gains and dividends for higher-income taxpayers would go back up to 20% (they’re 15% now). Estimated savings: $700 billion in revenue over 10 years.
This isn’t a terribly popular provision but Congress has an “out” that it can spin come election time. The liberals will argue that it’s technically not raising taxes, it’s letting tax cuts expire. So, I expect it to survive more or less intact. Maybe some wiggle on the numbers.
As expected, Obama wants to cap the tax rate for itemized deductions at 28% as opposed to the taxpayer’s actual tax rate. This would result in a limited ability to deduct charitable donations, home mortgage interest, and real estate taxes. Estimated savings: $291 billion over 10 years.
This is a trickier issue for the Dems. It’s actually not that different from what happened during the Reagan years – so from that perspective, it’s almost *gasp* a bit fiscally conservative. But two things stand in the way of a guarantee “yes” vote: the powerful housing and banking lobbies and an angry nonprofit sector. I’m not sure that this provision will sail through. I expect a lot of loud conversation, but I think it will eventually pass.
No repeal for the federal estate tax. The budget suggests more or less a freeze at the 2009 levels: a $3.5 million personal exemption with a top rate of 45%. Estimated savings: $262 billion over 10 years.
Who knows what the heck will happen here? Last year, I was positive that the freeze would happen – and here it is February and we have nothing. Conservatives are pushing for a $5 million exemption, a far cry from the $10 million exemption in the cards earlier. They could get it. I’m thinking that a compromise bill might see a higher exemption than the $3.5 million but an increase in the top rate. Most taxpayers aren’t bothered by higher rates for the über rich – and a $5 million personal exemption would mean that couples could exempt up to $10 million. That’s Paris Hilton wealthy, not Joe the Plumber aspirational wealthy.
And now, the cuts:
The budget proposes making permanent Bush’s 2001 and 2003 tax cuts for those under the “upper income” thresholds, meaning $200,000 for individual taxpayers and $250,000 for those married taxpayers filing jointly. Estimated cost: $2 trillion over 10 years.
Cake. Totally going to happen. It’s an election year.
Also to be made permanent? Changes to the Alternative Minimum Tax (AMT). Estimated cost: $660 billion over 10 years.
Won’t happen. I could be wrong but Congress has had 10 years to change this mess and they haven’t done it. Why? $660 billion, that’s why. The AMT is a revenue raiser and I don’t know that most taxpayers understand it well enough to articulate why they hate it. That makes it appealing to Congress to keep patching it. I think we’ll see another patch.
The budget also calls for a single extension of the Making Work Pay tax credit that adds a few dollars to workers’ paychecks every pay period. There’s only a one year plan in the budget but the hope is that it will be renewed every year for the next ten years. Estimated cost: $61.2 billion over 10 years.
This credit could survive a vote and here’s why: it puts money in the hands of taxpayers (always good) and it restricts eligibility to those who work. It’s not considered welfare, a real plus for middle of the road conservatives who might be looking for a way to appear conservative but reach out to the middle class.
As part of his agenda to “rescue” the middle class, the President suggests expanding the Earned Income Tax Credit and the child-care tax credit. Estimated cost: $27.8 billion over 10 years.
An uphill battle. The EITC is a magnet for tax cheats and considered the nation’s largest social welfare program. Even liberals can’t justify expanding the EITC – the child-tax credit is another story. I think we’ll see a compromise bill.
In an effort to make college more affordable, the budget proposes making the American Opportunity Tax Credit permanent; currently, it’s a temporary expansion of the Clinton administration’s Hope Credit. Estimated cost: $75.4 billion over 10 years.
The ridiculously escalating costs of attending college are a real concern to a lot of taxpayers – just ask this mom of 3. I expect this to pass with flying colors. It’s not expensive and it’s a “feel good” provision that appears to reward hard work. This will fly on both sides of the aisle.
Some key terminations and reductions:
The budget proposes the elimination of the Advanced Earned Income Tax Credit (AEITC) because “it is used by very few taxpayers and has a very high error rate.” Estimated savings: $760 million over 10 years.
Done. Not even a discussion.
Overall, the budget looks to increase revenue. While spending is reduced from 2009 and 2010, it still outpaces revenue. For a closer look at where it’s going, check out the NY Times interactive budget chart (it’s pretty cool).
What do you think? Any surprises here?
My opinion: Obama is not the blame for the tax hikes, blame the people who voted for him. He is doing what he said was going to do. Destroy the United States of America. Now I belive Bin laden, he said that the next Attack will kill more America. Obama is the next attack on Americans.
Joe…I hope you get kicked in the nuts.
Taxgirl. I appreciate your breakdown as I try to understand this mess.