Today, the U.S. Department of the Treasury released the General Explanations of the Administration's FY2017 Revenue Proposals, known as the “Greenbook.” The Greenbook details the revenue proposals included in the President’s FY 2017 Budget.
The Administration’s receipt proposals begin the process of reforming the Code to help address the challenges faced by working families. These proposals: (1) help make work pay by expanding the Earned Income Tax Credit for workers without qualifying children and creating a new second earner credit; (2) reform and simplify tax incentives that help families save for retirement and pay for college and child care; and (3) reform capital gains taxation to eliminate a loophole that lets substantial capital gains income escape tax forever. They also reduce the deficit and make the tax system fairer by eliminating a number of tax loopholes and reducing tax benefits for higher-income taxpayers.
Among the proposals are also many of the key elements of business tax reform, which illustrate tax policies that should be part of a pro-growth reform that lowers the corporate income tax rate while broadening the tax base, and does not add to the deficit in the short- or long-term, including paying for the extension of business tax provisions that Congress recently enacted.
View the full Greenbook here.
The FY2017 Greenbook Includes Key Policies to:
Reform the U.S. International Tax System, As part of the ELEMENTS OF BUSINESS TAX REFORM
Impose a 19-percent Minimum Tax on Foreign Income.This proposal generally would impose a minimum tax on foreign income of U.S. multinationals at a rate of 19 percent reduced (but not below zero) by 85 percent of the effective foreign tax rate imposed on that income. Under the minimum tax, foreign earnings of U.S. multinationals generally would be subject to tax either immediately when earned or, if sufficiently high foreign taxes are paid on the income, not at all. Imposing an immediate minimum tax on foreign earnings that otherwise would be eligible for indefinite deferral under current law would directly address the incentives under the current system to locate production overseas and to shift and maintain profits abroad.
Impose a 14-percent One-Time Tax on Previously Untaxed Foreign Income. As part of transitioning to a reformed international tax system, this proposal would impose a one-time transition toll charge of 14 percent on untaxed foreign earnings that U.S. companies have accumulated overseas. The earnings subject to the one-time tax could then be repatriated without any further U.S. tax.
Limit the Ability of Domestic Entities to Expatriate. In recent months, the Treasury Department and the Internal Revenue Service took additional, targeted action to both make it more difficult for U.S. companies to invert and reduce the tax benefits of corporate tax inversions. However, as we have consistently said, business tax reform and specific anti-inversion legislation is the only way to fully address these transactions. This proposal would broaden the definition of an inversion under the law and thereby limit the ability of domestic entities to invert. Currently, the tax consequences of such transactions depend on the percentage of the shares of the new foreign parent owned, following the transaction, by the shareholders of the former U.S. parent:
- If the continuing ownership is 80 percent or more: The transaction is disregarded and the company continues to be treated as a U.S. corporation for U.S. tax purposes.
- If the continuing ownership is at least 60 percent but less than 80 percent: This is considered an inversion transaction for tax purposes – the foreign status is respected but other tax penalties apply.
The proposal would broaden the definition of an inversion in two ways. First, it would reduce the 80-percent shareholder continuity threshold for domestic corporation status to a greater-than-50-percent threshold, and eliminate the 60-percent threshold. Second, it would provide that, regardless of the level of shareholder continuity, a transaction is an inversion if the fair market value of the stock of the domestic entity is greater than the fair market value of the stock of the foreign acquiring corporation, and if the affiliated group that includes the foreign acquiring corporation is primarily managed and controlled in the United States and does not have substantial business activities in the foreign country.
Restrict Deductions for Excessive Interest of Members of Financial Reporting Groups.Claiming deductions for interest paid is a common technique used by multinational firms to erode the U.S. tax base. Under current law, foreign multinational groups are able to load up their U.S. operations with related-party debt and use the interest deductions to shift up to half of their U.S. earnings to low-tax jurisdictions. This ability gives foreign multinationals a competitive advantage over purely domestic firms, which have to pay U.S. tax on all of their earnings from U.S. operations. The proposal would address over-leveraging of a foreign-parented group’s U.S. operations relative to the rest of the group’s operations by limiting U.S. interest expense deductions to the U.S. subgroup’s interest income plus the U.S. subgroup’s proportionate share of the group’s net interest expense.
Provide Tax Incentives for Locating Jobs and Business Activity in the United States and Remove Tax Deductions for Shipping Jobs Overseas.The proposal would make the United States a more attractive location for businesses by creating a tax incentive to bring offshore jobs and investments back home, while reducing incentives to ship jobs overseas. Specifically, the proposal would create a new general business credit against income tax equal to 20 percent of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business, and would disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business.
Limit Shifting of Income Through Intangible Property Transfers. Under current law, there is a lack of clarity regarding the scope of the definition of intangible property that applies for purposes of taxing outbound transfers of intangible property by a U.S. person to a foreign corporation and the allocation of income and deductions among related taxpayers. These rules are intended to prevent inappropriate shifting of income from the U.S. to low- or no-tax jurisdictions. The proposal would provide that the definition of intangible property for these purposes also includes workforce in place, goodwill, and going concern value, and any other item owned or controlled by a taxpayer that is not a tangible or financial asset and that has substantial value independent of the services of any individual.
Restrict the Use of Hybrid Arrangements that Create Stateless Income. This proposal addresses tax avoidance techniques that exploit inconsistencies between U.S. tax law and the tax laws of foreign countries to create so-called “stateless income.” The proposal would deny deductions for interest and royalty payments (which are generally deductible under current law) when such payments are made to related parties pursuant to transactions involving hybrid arrangements that result in income that is not subject to tax in any jurisdiction. In addition, the proposal would eliminate exceptions under current law which lead to situations where shareholders are not subject to tax currently in either the United States or in the related firm’s foreign jurisdiction because an entity is considered a separate corporation under U.S. tax law and a pass-through entity in another jurisdiction. The proposal would require current U.S. taxation of such payments.
PROVIDE SIMPLIFICATION AND TAX RELIEF FOR SMALL BUSINESSES, As part of the ELEMENTS OF Business Tax reform
Expand Expensing for Investments Made by Small Businesses. The proposal would increase the maximum expensing limitation to $1 million and the phase-out threshold would remain at $2 million with both amounts being indexed for inflation. The proposal would become effective for property placed in service in 2017.
Expand Simplified Accounting for Small Businesses and Establish a Uniform Definition of Small Business for Accounting Methods. Beginning in 2017, small businesses defined as those with less than $25 million in average annual gross receipts would be exempted from certain accounting requirements, allowing them to use the cash method of accounting, avoid the uniform capitalization requirements for both inventory and produced property, and use an inventory method that either conforms to the taxpayer’s financial accounting method or is otherwise properly reflective of income. The gross receipts threshold would be indexed for inflation for taxable years beginning after December 31, 2017.
Increase the Limitations for Deductible New Business Expenditures and Consolidate Provisions for Start-Up and Organizational Expenditures. A taxpayer is generally allowed to deduct up to $5,000 of start-up expenditures in the taxable year in which an active trade or business begins, and may deduct up to $5,000 of organizational expenditures in the taxable year in which a corporation or partnership begins business. In each case, the $5,000 amount is reduced (but not below zero), by the amount by which such expenditures exceed $50,000. The proposal would consolidate these provisions, and would allow $20,000 of combined new business expenditures to be expensed, beginning in 2017. That immediately expensed amount would be reduced by the amount by which the combined new business expenditures exceed $120,000.
Expand and Simplify the Tax Credit Provided to Qualified Small Employers for Non-Elective Contributions to Employee Health Insurance. This proposal would expand the credit for small employers to provide health insurance for employees and their families to employers with up to 50 (rather than 25) full-time equivalent employees and would phase out the credit between 20 and 50, rather than between 10 and 25, full-time equivalent employees. A new phase-out methodology would benefit qualified smaller businesses by ensuring they were eligible for some amount of credit if they met the statutory constraints.
ENCOURAGE JOB CREATION, MANUFACTURING, RESEARCH AND CLEAN ENERGY, As part of the ELEMNTS OF Business Tax reform
Enhance and Simplify Research Incentives. Current law provides a research and experimentation (R&E) credit (recently made permanent), computable using one of two allowable methods. Under the “traditional” method, the credit is 20 percent of qualified research expenses above a base amount related to the firm’s historical research intensity during the 1984 to 1988 period. Under the alternative simplified research credit (ASC), the credit is 14 percent of qualified research expenses in excess of a base amount reflecting its research spending over the prior three years. This proposal would repeal the “traditional” method. In addition, the proposal would increase the rate of the ASC from 14 percent to 18 percent, eliminate the reduced ASC rate of six percent for business without qualified research expenses in the prior three years, allow the credit to offset Alternative Minimum Tax liability, repeal a special rule for pass-thru entities that limited use of the credit, and allow 75 percent of payments to qualified non-profit organizations (such as universities) to be included as contract research (an increase from 65 percent).
Extend and Modify Certain Employment Tax Credits, Including Incentives for Hiring Veterans. This proposal would permanently extend the Work Opportunity Tax Credit (WOTC) to qualified individuals who begin work after December 31, 2019. The Indian Employment Credit would be permanently extended to apply to qualified individuals who being work after December 31, 2016. Beginning in 2017, the Administration also proposes to expand the definition of disabled veterans eligible for the WOTC to include disabled veterans who use the GI bill to receive education or training starting within one year after discharge and who are hired within six months of leaving the program.
Provide a Community College Partnership Tax Credit. This proposal would provide businesses with a new tax credit for hiring graduates from community and technical colleges as an incentive to encourage employer engagement and investment in these education and training pathways. The proposal would provide $500 million in tax credit authority for each of the five years, 2017 through 2021. The tax credit authority would be allocated annually to states on a per capita basis and would be available to qualifying employers that hire qualifying community college graduates.
Modify and Permanently Extend Renewable Electricity Production Tax Credit and the Investment Tax Credit.This proposal would permanently extend the renewable electricity production tax credit, make it refundable, and make it available to otherwise eligible renewable electricity consumed directly by the producer rather than sold to an unrelated third party, provided this production can be independently verified. This proposal would also allow individuals to claim the production tax credit for electricity produced in connection with a residence, regardless of whether it is consumed on-site or sent back to the grid. Further, the proposal would permanently extend the renewable energy investment tax credit for businesses under the terms available in 2017. Specifically, the proposal would permanently extend the 30 percent investment tax credit for solar, fuel cell, and small wind property and the 10 percent credit for geothermal and other sources.
Provide a Carbon Dioxide Investment and Sequestration Tax Credit. This proposal would provide $2 billion for a new, refundable allocable investment tax credit for carbon capture and storage property. In determining the award of the investment tax credit, the Treasury Secretary would consider (i) the credit per ton of net sequestration capability and (ii) the expected contribution of the technology and the type of plant to which that technology is applied to the long-run economic viability of carbon sequestration from fossil fuel combustion. The proposal would also provide a 20-year, indexed, refundable sequestration tax credit. The credit would be $50 per metric ton of carbon dioxide permanently sequestered and not beneficially reused (e.g., in enhanced oil recovery) and $10 per metric ton for carbon dioxide that is permanently sequestered and beneficially reused.
PROMOTE REGIONAL GROWTH, As part of the ELEMENTS OF Business Tax reform
Modify and Permanently Extend the New Markets Tax Credit (NMTC) The proposal would permit NMTCs resulting from qualified equity investments made after December 31, 2019, to offset AMT liability, which is not currently allowed. This proposal would also permanently extend the NMTC and provide $5 billion of credit allocation authority per year. This would create greater certainty for taxpayers and encourage additional capital investments in low-income communities.
Reform and Expand the Low-Income Housing Tax Credit (LIHTC). The President’s Budget includes several proposals to reform and expand the LIHTC including allowing conversion of private activity bond (PAB) volume cap into LIHTCs. Under current law, each state is provided annually a statutorily determined amount of LIHTCs (the LIHTC ceiling) for the state to allocate to developers who want to construct or rehabilitate buildings for low-income residents. Also, under current law, each state is provided annually a statutorily determined limit (volume cap) on the qualified PABs that the state may issue. If a building is at least half financed with PABs subject to the volume cap, the building may earn LIHTCs that are not subject to the state’s LIHTC ceiling but that are earned at a lower rate than the rate that generally applies to allocated LIHTCs, provided that all the qualifications are met. A major part of the proposal is that it would allow each state annually to convert up to 18 percent of its PAB volume cap into an increase in its LIHTC ceiling. If a developer is awarded sufficient PAB volume cap to issue bonds that would qualify its building for LIHTCs but the developer does not need PAB financing, then the developer would be able to convert its volume cap into the amount of LIHTCs that it would have earned if it had issued the bonds and financed the building with them.
ENCOURAGE INVESTMENT IN INFRASTRUCTURE, As part of the ELEMENTS OF Business Tax reform
Provide America Fast Forward Bonds (AFFB) and Expand Eligible Uses. To build upon the successful temporary Build America Bond program under the American Recovery and Reinvestment Act of 2009, this proposal would create a new, expanded, and permanent America Fast Forward Bond (AFFB) program as an optional alternative to traditional tax-exempt bonds. AFFBs would be taxable bonds issued by State and local governments for which the federal government makes direct borrowing subsidy payments to those issuers (through refundable tax credits) at a subsidy rate equal to 28 percent of the coupon interest on the bonds. This subsidy rate is intended to be approximately revenue neutral relative to the estimated future federal tax expenditures for tax-exempt bonds. As an expansion of uses, AFFBs could be used for projects typically financed with qualified private activity bonds and qualified public infrastructure bonds in order to support a wide variety of public investments.
Provide “Qualified Public Infrastructure Bonds,” (QPIBs).To facilitate public-private partnerships, this proposal would create a new category of tax-exempt qualified private activity bonds, called “Qualified Public Infrastructure Bonds” (QPIBs) to finance specified types of infrastructure projects. The projects must be owned by State or local governments and be available for general public use. Eligible types of projects would include airports, docks and wharves, mass commuting facilities, facilities for the furnishing of water, sewage facilities, solid waste disposal facilities, qualified highway or surface freight transfer facilities, and broadband telecommunications assets. The proposal would be effective for bonds issued starting January 1, 2017.
OTHER BUDGET PROPOSALS SEPARATE FROM THE ELEMENTS OF BUSINESS TAX REFORM
REFORM TAXATION OF THE FINANCIAL SECTOR
Impose a Financial Fee. Todiscourage excessive risk-taking by financial firms, large financial firms would pay an annual 7 basis point fee on their liabilities.
Tax Carried Interest Profits as Ordinary Income.Current law provides that an item of income or loss of the partnership retains its character and flows through to the partners, regardless of whether the partners received their interests in the partnership in exchange for services. Thus, some service partners in investment partnerships are able to pay a 20-percent long-term capital gains tax rate, rather than ordinary income tax rates on income items from the partnership. The Administration would tax as ordinary income a partner’s share of income on an “investment service partnership interest” (ISPI) regardless of the character of the income at the partnership level. In addition, the partner would be required to pay self-employment taxes on such income, and the gain recognized on the sale of an ISPI that is not attributable to invested capital would generally be taxed as ordinary income, not as capital gain.
SUPPORT WORKING FAMILIES AND THE MIDDLE CLASS
Provide a New, Simple Tax Credit to Two-Earner Families. This proposal would provide a second earner tax credit of up to $500 per year to help cover the additional costs faced by families in which both spouses work. The proposal would benefit over 23 million low- and middle-income two-earner married couples.
Reform Child Care Tax Incentives. This proposal would repeal dependent care flexible spending accounts, increase the child and dependent care credit, and create a larger credit for taxpayers with children under age five. The income level at which the current-law credit begins to phase down would be increased from $15,000 to $120,000, so the rate reaches 20 percent at income above $148,000. Taxpayers with young children could claim a child care credit of up to 50 percent of expenses up to $6,000 ($12,000 for two young children). The credit rate for the young child credit would phase down at a rate of one percentage point for every $2,000 (or part thereof) of adjusted gross income over $120,000 until the rate reaches 20 percent for taxpayers with incomes above $178,000. The expense limits and income at which the credit rates begin to phase down would be indexed for inflation for both young children and other dependents after 2017.
Simplify and Better Target Education Tax Benefits to Improve College Affordability. This proposal would consolidate the Lifetime Learning Credit and student loan interest deduction into an expanded AOTC, which would be available for the first five years of postsecondary education and for five tax years. In addition, this proposal would exclude all Pell Grants from gross income and the AOTC calculation, modify reporting of scholarships, repeal the student loan interest deduction, and provide a tax exclusion for certain debt relief and scholarships.
Expand Earned Income Tax Credit for Workers without Qualifying Children. This proposal would expand the Earned Income Tax Credit for workers without children by doubling the maximum credit and expanding the range of eligible ages to cover workers between 21 and 67.
RAISE ADDITIONAL REVENUE BY ASKING THE WEALTHIEST TO PAY THEIR FAIR SHARE
Limit Certain Tax Expenditures for the Most Affluent by Capping their Value at 28 Percent. This proposal would limit the tax rate at which upper-income taxpayers can use itemized deductions and other tax preferences to reduce tax liability to a maximum of 28 percent. This limitation would reduce the value to 28 percent of the specified exclusions and deductions that would otherwise reduce taxable income in the top three individual income tax rate brackets of 33, 35, and 39.6 percent.
Reform the Taxation of Capital Income to Help Ensure the Wealthiest Pay their Fair Share of Taxes. This proposal eliminates the capital gains step-up in basis at death with protections for the middle class, surviving spouses, small businesses and charities. Among other provisions, there would be a $100,000 per-person exclusion of other gains recognized at death. The proposal also raises the top tax rate on capital gains and qualified dividends from 20 percent to 24.2 percent, or 28 percent including the net investment income tax.
Rationalize Net Investment Income and Self-Employment Contributions Act (SECA) Taxes. Building off of last year’s proposal to conform SECA taxes for professional service businesses, this year’s proposal further closes loopholes in the SECA tax and the Net Investment Income Tax (NIIT). Under this proposal, all active business income would be subject to either the NIIT or Medicare payroll tax, so choice of business entity would not be a strategy for avoiding these taxes. All the revenues from the NIIT would be deposited in the Medicare Trust Fund. This proposal would also rationalize the taxation of professional services businesses by treating individual owners or professional service businesses taxed as S corporations or partnerships as subject to SECA taxes in the same manner and to the same degree. This proposal would go into effect after December 31, 2016.
Implement the Buffett Rule by Imposing a New “Fair Share Tax.” This budget proposal ensures that high-income taxpayers cannot use deductions and preferential tax rates on capital gains and dividends to pay a lower effective rate of tax than many middle-class families. The tax is intended to ensure that very high income families pay tax equivalent to no less than 30 percent of their income, adjusted for charitable donations.
Restore the Estate, Gift, and Generation-Skipping Transfer (GST) Tax Parameters in Effect in 2009. This proposal would make permanent the estate, GST, and gift tax parameters as they applied during 2009. The top tax rate would be 45 percent and the exclusion amount would be $3.5 million per person for estate and GST taxes, and $1 million for gift taxes. The proposal would be effective for the estates of decedents dying, and for transfers made, after December 31, 2016.
Modify Transfer Tax Rules for Grantor Retained Annuity Trusts and other Grantor Trusts.
Donors use certain types of trusts to minimize taxes. The proposal would make overly generous outcomes more difficult to achieve by requiring that donors leave assets in grantor retained annuity trusts (GRATs) for a fairly long period of time, prohibiting the grantor from engaging in a tax-free exchange of any asset held in the trust, and imposing other restrictions.
REFORMS TO RETIREMENT AND HEALTH BENEFIT PLANS
Make it Easy and Automatic for Workers to Save for Retirement. This proposal would dramatically expand access to employer-based retirement savings options, including automatic IRA options for employees.
Permit Unaffiliated Employers to Maintain a Single Multiple Employer Defined Contribution Plan (MEP). Under current law, unaffiliated employers (firms not in the same line of business or without other common characteristics) cannot form a single defined contribution (401(k)) retirement plan. As a result, some smaller firms are unable to take advantage of the potential savings in administrative costs such a combination would allow. This proposal would permit unaffiliated employers to join a defined contribution MEP that would be treated as a single plan under the Employment Retirement Income Security Act (ERISA). This proposal would go into effect after December 31, 2016.
Improve the Excise Tax on High Cost Employer-Sponsored Health Coverage. Under current law for 2020 and later, the cost of employer-sponsored health coverage in excess of a threshold is subject to a 40-percent excise tax. The threshold is $10,200 for self-only coverage and $27,500 for other coverage in 2018 dollars, indexed to the Consumer Price Index for All Urban Consumers (CPI) plus one percentage point for 2019 and to the CPI thereafter. To ensure that the tax is only ever applied to higher-cost plans, this proposal would increase the tax threshold to the greater of the current law threshold or a “gold plan average premium” that would be calculated for each state. This proposal would also simplify the accounting of employer and employee contributions to a flexible spending account.
STREAMLINE AND IMPROVE TAX ADMINISTRATION
Increase Funding for IRS Enforcement through a Program Integrity Cap Adjustment. This proposal would adjust the discretionary spending limits for IRS tax enforcement, compliance, and related activities, including tax administration activities at the Alcohol and Tobacco Tax and Trade Bureau (TTB). The proposed cap adjustment for fiscal year 2017 will fund $515 million in enforcement and compliance initiatives and investments above current levels of activity, allowing the IRS to continue to target international tax compliance and restore previously reduced enforcement levels. Beyond 2017, the Administration proposes further increases in new enforcement and compliance initiatives each fiscal year from 2018 through 2021 and to sustain all of the new initiatives and inflationary costs via cap adjustments through FY 2026.
Improve the Whistleblower Program. This proposal would explicitly protect whistleblowers from retaliatory actions, consistent with the protections currently available to whistleblowers under the False Claims Act. In addition, the proposal would also provide that certain safeguarding requirements apply to whistleblowers and their legal representatives who receive tax return information in whistleblower administrative proceedings and extend the penalties for unauthorized inspections and disclosures of tax return information to whistleblowers and their legal representatives.
Combat Tax-Related Identity Theft. This proposal would provide that criminals who are convicted for tax-related identity theft may be subject to longer sentences than the sentences that apply to those criminals under current law. In addition, the proposal would add a $5,000 civil penalty to the Code to be imposed in tax identity theft cases on the individual who filed the fraudulent return. Under the proposal, the IRS would be able to immediately assess a separate civil penalty for each incidence of identity theft. There is no maximum penalty amount that may be imposed.
Accelerate Information Return Filing Due Dates. This proposal would accelerate the due date for filing for many information returns with the Internal Revenue Service, including Forms 1098 and 1099, from late February to January 31, the same day that the payee statements are due.
Increase Oversight of Paid Tax Return Preparers. This proposal would explicitly provide that the Secretary of the Treasury has the authority to regulate all paid tax return preparers. This proposal would be effective as of the date of enactment.
OTHER REVENUE RAISERS
Impose an Oil Fee. This proposal would impose a fee on oil and oil products that would be equivalent to $10.25 per barrel of crude oil. The fee would be phased-in over a 5 year period and would be collected on domestically produced as well as imported petroleum and imported petroleum products. Exported petroleum products would not be taxed and home heating oil would be temporarily exempt. Revenue from the fee would fund the 21st Century Clean Transportation Plan to upgrade our transportation system, invest in cleaner technologies, improve resilience, and reduce carbon emissions. In addition, 15 percent of the revenues would be dedicated for relief for households with particularly burdensome energy costs. Other fuel-related trust funds would be held harmless.