With the arrival of President Barack Obama on Pennsylvania Avenue and strengthened Democratic majorities in the House and Senate, taxpayers will soon be facing a sea of change — some would say a tidal wave — in tax policy.
The National Taxpayers Union (NTU) has compiled the following must-read list of tax hikes that have a strong likelihood of being considered during the 111th Congress (2009-2010).
1. Repeal/Expiration of the 2001 and 2003 Tax Cuts. During the campaign, Barack Obama proposed repealing the Bush tax cuts for incomes over $250,000, bringing back the higher rates on capital gains and preventing the one-year repeal of the estate tax in 2010 by keeping it at its 2009 levels. The President-elect has since distanced himself from these ambitions, saying at a press conference in November 2008, “Whether that’s done through repeal, or whether that’s done because the Bush tax cuts are not renewed, is something that my economic team will be providing me a recommendation on.”
2. Payroll Tax Increases. The Social Security payroll tax is currently applied to incomes of up to $102,000, with employers and employees both paying a 6.2 percent rate. Candidate Obama proposed levying the payroll tax on wages and salaries above $250,000. If enacted, top marginal federal tax rates (including income, Social Security, and Medicare taxes) would go from 37.9 percent to 50.3 percent. Obama’s transition website now says that “[Obama] and Joe Biden are considering plans that will ask those making over $250,000 to pay in the range of 2 to 4 percent more in total (combined employer and employee).”
3. Smaller Alternative Minimum Tax Patches. Because the Alternative Minimum Tax (a parallel tax structure originally aimed at the well-to-do) was never indexed for inflation, Congress has adopted the habit of passing a yearly “patch” to keep the tax from hitting an additional 22 million middle-class households. Should Congress fail to pass a patch equal to or greater than past versions, more taxpayers would see a net tax burden increase. Taxpayers could also see a higher tax bill should the AMT be “repealed” but resurrected under a new name, as was outlined in the “mother of all tax bills” put forth by House Ways and Means Committee Chairman Charles Rangel (D-NY) in 2007. Commenting on Rangel’s plan, NTU Vice President for Policy and Communications Pete Sepp likened it to “robbing Peter and Paul while convincing both of them that the other guy is the one paying the higher taxes.”
4. Imposition of “Windfall Profits” Energy Taxes. During the campaign, Obama pledged to levy a “windfall profits tax” on energy companies when the price of a barrel of oil topped $80. President-elect Obama backed away from this proposal after oil prices dropped sharply, and references to the plan were removed from www.change.gov. Even so, certain Congressional leaders are expected to pursue an environmental agenda that would target certain energy producers.
5. Modification of Health Care Tax Treatment. During the campaign, Obama’s health care proposal required large businesses to pay a new tax (“a percentage of payroll”) to fund a government program if they didn’t contribute “meaningful” amounts to their employees’ health care plans. The exclusion of employer-provided health care benefits from income taxes may also come under scrutiny. A November 2008 white paper from Senate Finance Committee Chairman Max Baucus (D-MT) claimed that “tax breaks for health insurance premiums and other health expenses are among the largest tax expenditures in the Federal budget.” The white paper outlined the option of “capping the tax exclusion based on the value of health benefits or, as an alternative, based on a person’s income — or both.”
6. Increase in the Federal Excise Tax on Cigarettes. President Bush twice vetoed a $35 billion State Children’s Health Insurance Program (SCHIP) expansion bill during the 110th Congress, which called for a 61-cent-per-pack increase to the 39-cents-per-pack federal tobacco tax. A similar (if not more expensive) SCHIP package, complete with cigarette tax hike, is likely to be among the first bills considered in the next few weeks. Speaking to a congressional health care forum in April 2007, Rahm Emanuel, a former Illinois representative and now Obama’s pick for White House chief of staff, likened the SCHIP fight to “spring training for universal health care.”
7. Increase in the Federal Excise Tax on Gasoline. Top Democrats have proposed hundreds of billions of dollars in new government infrastructure spending, and an increase in the federal motor fuel excise tax (currently at 18.4 cents per gallon for unleaded and 24.3 cents per gallon for diesel) is often suggested for underwriting these new outlays. Plans to boost the gas tax by 5 and 50 cents per gallon emerged in the 110th Congress. Said House Transportation Committee Chairman Jim Oberstar (D-Minn.) at a 2007 press conference announcing his “temporary” gas tax increase plan, “If you are not prepared to invest an additional 5 cents in bridge reconstruction and road reconstruction, God help you.” Oberstar’s proposal went far beyond 5 cents, with an estimated total cost to taxpayers of $25 billion over three years.
8. Approval of the Streamlined Sales Tax Project. The Streamlined Sales Tax Project (SSTP) is an attempt to create a multi-state cartel for processing online sales tax payments. Supporters are seeking a top-down imposition of the project from Congress, which would result in a net increase in the tax payments of online interstate shoppers. In a 2003 press conference announcing legislation to approve the SSTP, Representative Bill Delahunt (D-MA) said the tax collection measure would allow “the states to collect the tens of billions they are owed in unpaid taxes on remote sales.” Current estimates on the amount of uncollected sales tax revenue vary widely depending on the source, ranging from $3.2 billion to $27 billion for 2006.
9. Repeal of Tax Protections for Retirement Savings. In late 2008, the House Committee on Education and Labor heard testimony on a plan to radically alter tax policy by eliminating the tax benefits for 401(k) savings (currently, investment contributions and returns are allowed to grow tax-free until withdrawals are made later in life). In a bizarre attempt to equate foregone revenues with actual government spending, Committee Chairman George Miller (D-Calif.) said, “We’ve invested $80 billion into subsidizing this activity … what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 billion for a policy that is not generating what we … say it should?” While complete repeal is unlikely, higher-income families’ accounts could be targeted.
10. Attack on Earnings Deferral and International Tax Competition. In the Senate and on the campaign trail, Obama regularly attacked tax-minimization strategies, saying “we need to crack down on individuals and businesses that abuse our tax laws.” Congress is expected to pursue policies that would end tax deferral on domestic companies’ foreign earnings and hamper international tax competition by discouraging Americans from investing in specific low-tax countries.
Obama & Co. are gearing up for a massive expansion in government outlays; the price tag for an expected “stimulus” package is now topping $775 billion. Taxpayers will be stuck with the tab for this new spending, either now (higher taxes) or later on (higher debt). A mixture of new taxes and deficit spending is likely to finance this boom in federal disbursements.
While the above-mentioned tax hikes will undergo mutations as they move through the legislative process, we will need to be on our guard this year and next if we hope to keep the government from digging deeper into our pockets.
NTU’s 362,000 members will be working hard to convince the politicians in D.C. that spending restraint and pro-growth tax policy — not free-wheeling government giveaways and higher taxes — is the best answer to our nation’s fiscal challenges.