President Obama’s fiscal 2016 budget would raise government revenues as a share of gross domestic product steadily over the next decade, and make the tax code far more complex.
By now, everyone has heard of the increase in capital-gains tax rates (yielding $208 billion over 10 years), the 19 percent tax rate on foreign earnings ($206 billion), and limits on individual itemized deductions together with a 30% tax rate for millionaires ($638 billion).
But what about the tax changes the pundits have overlooked? Here are five little-discussed tax proposals.
1. Forget deductions for charitable contributions linked to college sports ticket purchases. Few provisions will cause more of an uproar than this: a contribution to the alma mater is not counted as a charitable contribution if it entitles donors to buy advance tickets for sporting events. It will not even sit well with the president’s liberal ivory tower supporters.
Today, if donations entitle alumni to advance ticket purchases, they can deduct 80 percent of the donation. Come Jan. 1, 2016, none of the contribution would be deductible. This goes to the heart of alumni contributions to Ole Miss and the Crimson Tide. The White House estimates that this change would bring in $2.5 billion over 10 years. But colleges and universities will not give in so easily. It is far more likely that universities will move to an informal donation system, one that is not traceable by the Internal Revenue Service.
2. Stop saving, stupid. Many say that Social Security is going broke, people are living longer, and that we are not saving enough for retirement. But the president thinks Americans are saving too much. His budget wants to limit retirement savings to an amount sufficient to generate an annuity of $210,000 beginning at age 62. No matter that this is hard to estimate, even for actuaries.
Too bad for you if you live in New York City or San Francisco, where $210,000 might not be enough to pay the rent, go out to dinner and make occasional trips to see the grandchildren. This provision would generate $26 billion over 10 years.
3. Force independent contractors to become employees. Many workers prefer to operate as independent contractors. It suits them because they can work for a variety of employers and get higher cash wages, skipping the benefits. But unions, a key part of the administration’s base, want to count independent contractors as employees whenever possible, so they can be forced to participate in elections for union representation. An independent contractor is not a potential member of the International Association of Machinists & Aerospace Workers or the Service Employees International Union.
So the president proposes to raise $10 billion over the next decade by allowing the Internal Revenue Service to reclassify independent contractors as employees. The budget states: “New enforcement activity would focus mainly on obtaining the proper worker classification prospectively, since in many cases the proper classification of workers may not be clear.” Quite. It is too much to expect the administration to allow workers to decide by themselves whether they want to be independent contractors or employees.
4. Return of a repealed Obamacare provision. In a blast from the past, businesses that purchase more than $600 worth of goods or services from a contractor would have to get that contractor’s Taxpayer Identification Number and check that TIN with the Internal Revenue Service. If the IRS does not certify the TIN as valid, the business is required to withhold a portion of the payments, either 15 percent, 25 percent, 30 percent or 35 percent, and presumably send the amount to the IRS. The provision is supposed to raise $831 million over 10 years.
This is similar to an Affordable Care Act provision, repealed by Congress in 2011, that would have required businesses to send a Form 1099 to any supplier from which they purchased $600 or more in goods and services. It was deemed overly complex and impractical. A taxi company would have to keep track of all gas purchased from different gas stations, for instance, and people might be purchasing from the same supplier operating under different names and unintentionally violating the law.
The same difficulties would apply to the new proposal. It takes real audacity for the president to propose a tax that was signed into law and repealed a little over a year later.
5. Expand electric-car tax credits to more worthy vehicles. President Obama wanted a million electric cars by 2015, but, according to the Electric Drive Transportation Association, there were only 174,000 battery-powered and hybrid plug-in vehicles on the nation’s roads in 2013.
The administration now wants to replace the electric-vehicle credit with credits worth $3.3 billion over 10 years for “advanced technology vehicles.” Passenger vehicles, which would get $2.9 billion of the credits, qualify if they “operate primarily on an alternative to petroleum” and “there are few vehicles in operation in the United States using the same technology as such vehicle.” This raises the possibility of credits for natural-gas vehicles, the closest substitute for the gasoline-powered engine. People could get tax credits of $10,000 per vehicle ($7,500 if the car costs more than $45,000).
The problem is that the $3.3 billion could be better spent. Awarding tax credits for particular technologies puts the government in the dangerous role of picking winners and losers. Natural gas is inexpensive and plentiful, and these cars would likely be chosen by consumers without the credit. They are popular in many parts of the world. Natural gas is already used to power fleets of buses and trucks, which can be charged overnight. These funds are a waste of taxpayer dollars because the technology will likely be adopted anyway. And if it isn’t, it probably isn’t worth the investment.
The good news is that with a Republican Congress that was elected on a platform of lowering taxes, none of these proposed tax changes are likely to become law. The bad news is that cooperation between the two parties seems as far off as ever.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here. This article originally appeared in MarketWatch and in e21: Economics for the 21st Century.
Top Reads from The Fiscal Times: