Tax reform, frequently discussed in Washington, got a boost from two recent proposals, one from the chair of the House tax writing committee and another from the White House. Rep. Dave Camp, R-Mich., chair of the House Ways and Means Committee, released a massive tax reform bill in late February. In early March, President Obama released his fiscal year (FY) 2015 budget proposals, detailing over 160 tax proposals. Both proposals share some similarities but also key differences.
Camp unveiled a sweeping tax reform plan (the Tax Reform Act of 2014) that would leave almost no part of the Tax Code unchanged. Everyone-individuals, businesses, exempt-organizations, governmental entities-would be impacted in one way or another. Some of Camp’s far-reaching proposals are:
- Consolidation of individual tax brackets
- Higher standard deduction
- Increased child tax credit
- Revised treatment of capital gains and dividends with a 40 percent exemption
- Repeal of alternative minimum tax (AMT)
- Consolidated education tax incentives
- Simplified tax return for seniors
- Reform of charitable contribution deduction
- Modified home mortgage interest deduction
- Top corporate tax rate of 25 percent
- Reform of rules for depreciation
- Permanent research tax credit
- Reform of the casualty loss rules
To pay for lower tax rates, Camp’s proposal would repeal many popular current tax incentives for individuals. They include the state and local sales tax deduction, higher education tuition deduction, student loan interest deduction, residential energy efficiency credits, adoption credit, and the itemized medical expense deduction. Many tax-advantage benefits of retirement plans would be curtailed or eliminated. Businesses also would lose many tax incentives, such as the Code Sec. 199 domestic production activities deduction, credits for production of fossil and alternative fuels, and the Work Opportunity Tax Credit. Camp’s plan would also repeal the like-kind exchange rules, the last-in, first-out (LIFO) method of accounting, and reform the rules for the treatment of travel and entertainment expenses. The foreign tax system would also be overhauled.
Camp did not propose to repeal the Patient Protection and Affordable Care Act. Camp did, however, propose to repeal the Affordable Care Act’s medical excise tax and prohibition of using health FSA dollars for over-the-counter medications. Camp has supported separate bills to delay the Affordable Care Act’s individual mandate but did not address this in his tax reform plan.
President Obama’s FY 2015 budget renews a number of past proposals and makes some new proposals. New proposals include significant enhancements to the child tax credit and the earned income credit. President Obama did not go so far as Camp to propose reducing the number of individual tax brackets but he did call for reducing the value of certain exclusions and deductions for higher income individuals and imposing a minimum tax rate of 30 percent on individuals with adjusted gross incomes above $1 million. For homeowners, the President proposed to extend the now-expired exclusion for cancellation of certain home mortgage debt. In the education area, the President called on Congress to make permanent the AOTC.
As in his past budget proposals, President Obama also signaled his willingness to reduce the corporate tax rate but businesses would need to give up some tax incentives in exchange. These could include many of the so-called business tax extenders, such as special expensing rules for television productions, environmental remediation and similar ones. The President did propose to permanently increase Code Sec. 179 small business expensing to $500,000 with a $2 million investment limit. However, bonus depreciation would not be extended.
Several of the President’s proposals are similar to ones from Camp. The President called for repealing the last-in, first-out (LIFO) method of accounting and many fossil fuel preferences. A new proposal would limit the amount of capital gain deferred under Code Sec. 1031 from a like-kind exchange of real property to $1 million per taxpayer per year, effective for exchanges completed after December 31, 2014. Both the President and Camp proposed to make permanent the research tax credit. They differed significantly on which other temporary incentives to continue or eliminate.
The GOP-controlled House is not expected to take up many of President Obama’s proposals, with the possible exception of some tax administration changes. The President’s budget received a more enthusiastic response from Senate Democrats, but passage in the Senate requires a supermajority of 60 votes, which Democrats lack. The outlook for Camp’s proposals is equally murky. As chair of the Ways and Means Committee, Camp may schedule hearings on his plan but the House GOP leadership ultimately must bring the bill to the full House for a vote, and it is unlikely to do so this year.
If you have any questions about the President’s proposals or Camp’s bill, please contact our office (908) 725-4414