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Higher taxes for some, tax breaks for others in Obama budget

The proposed Fiscal Year 2014 budget which President Barack Obama unveiled Wednesday would raise taxes for some Americans, not all of them upper-income earners, while awarding tax breaks to particular groups and interests such as college students, people who don’t save for retirement, and investors in low-income neighborhoods.

What’s most notable in the Obama plan is that despite much talk from the Simpson-Bowles commission and from other reformers of simplifying the tax code, Obama would, if Congress passed his plan, still be very much in the business of using the tax code to try to fine-tune the economy and engineer certain policy outcomes.

This targeted tax break approach seems exactly opposed to the tax reform effort that the chairmen of the House and Senate tax-writing committees are planning later this year.

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Under his plan – which covers the next 10 years – tax revenues would be nearly $1 trillion higher than the baseline current-law forecast by the Congressional Budget Office. Much of that additional revenue would come from tax increases he is proposing.

The president seeks to increase taxes by far more than the $600 billion tax increase in the American Taxpayer Relief Act (ATRA) of 2012 which he signed into law on Jan 2.

He would get the $580 billion by reducing certain tax preferences for upper-income earners. He would limit the value of itemized deductions to 28 percent for families in the highest tax brackets – an idea he offered in his very first budget proposal back in 2009.

Among the other tax increases Obama proposes:

  • A new “Financial Crisis Responsibility Fee” imposed on large banks and financial institutions, a kind of retroactive charge five years after the 2008 bailout of the financial sector. The fee is intended “to fully compensate taxpayers for the support they provided to the financial sector during the 2008–2009 economic crisis and to discourage excessive risk-taking” in the future, the president’s budget document says. If enacted, this targeted financial sector tax would raise nearly $60 billion, budget officials say.
  • An increase in the estate and gift tax of nearly $72 billion. This was an issue Congress thought it had settled when it passed ATRA at the end of 2012.
  • $78 billion in increased taxes on cigarettes and tobacco products.
  • $44 billion in tax increases on oil, natural gas and coal producers by eliminating certain tax breaks for those industries.
  • $10.7 billion from indexing all tax penalties to the inflation rate.
  • $9.3 billion from limiting the amount of money that higher-income people could put in tax-sheltered retirement accounts.

Yuri Gripas / Reuters

A staff member prepares the release and distribution of President Barack Obama's Fiscal Year 2014 Budget at the Government Printing Office in Washington April 10, 2013.

Many of these tax increases can be seen as part of an ongoing project by the president to shift more of the burden of paying for government and especially entitlement programs to upper-income Americans, both retirees and the currently employed.

In the same vein, the president again offered certain Medicare ideas he'd included in his budget plan last year: $68 billion in higher premiums, co-payments and surcharges for mostly higher-income Medicare recipients.

He’d get another $120 billion or so in revenue by tweaking the inflation indexing formula used to set the levels for the tax brackets, the standard deduction, and other provisions in tax law.

But on the other hand Obama also proposes an array of new tax breaks.

For example, he seeks:

  • A 10 percent tax credit for small businesses that hire new employees or increase wages. This would cost $25.7 billion in lost revenue.
  • Creation of tax-preferred "Promise Zones” in high-poverty communities which would provide tax breaks for hiring workers and investing within the zones, an idea somewhat reminiscent of former Housing Secretary Jack Kemp's Urban Enterprise Zones. This would cost $5.3 billion in lost revenue.
  • A new tax-preferred bond program called America Fast Forward Bonds, at a cost of $10 billion, for public school construction.
  • A new tax credit to encourage employers to offer retirement savings plans and to automatically enroll workers in them. Cost: $17.6 billion.

Obama’s proposal also makes some assumptions about future spending that might not turn out to be realistic: for example, it forecasts nearly $1.8 trillion in savings from overseas military operations that it assumes will not take place during the next 10 years.

The Obama blueprint isn’t likely to be adopted, but some of its specific proposals might be, if the president can use his persuasive power to bring Republican members of Congress to accept at least some of his new tax increases.

The initial response from GOP leaders was at best tepid.

“The document headed our way does not appear designed to bridge the differences between the House- and Senate-passed budgets. That’s the role Americans would expect the president to play at this stage,” said Senate Republican Leader Mitch McConnell.