President Barack Obama sent his 10-year budget plan to Congress on Feb. 26, proposing a $3.6 trillion budget for fiscal year 2010.  While many details of the president’s budgetary policies are not yet available, it’s clear from the limited detail in the budget outline that upcoming proposals will affect both private and publicly held companies across the country. First, included in the budget are proposals that will create hundreds of billions of tax increases on business. Among them:

• Repeal of the Last-in, First-out (LIFO) inventory accounting method. From the revenue estimate, likely requiring income recognized as a result of this change to be spread over 10 years.
• Codifying the economic substance doctrine. Under this doctrine, currently, courts can invalidate a tax transaction if it lacks economic substance independent of the tax considerations.
• Implement international enforcement, reform deferral and other tax-reform policies. (no futher detail provided).
• Extending the estate tax at 2009 levels (45 percent top rate and $3.5 million exemption).
• Reinstating top two tax rates (36 percent, 39.6 percent) on taxpayers earning over $200,000 ($250, 000 for families).
• Reinstate personal exemption phaseout and limitation on itemized deductions for taxpayers earning over $200,000 ($250,000 for families).
• Impose 20 percent capital gains/dividends rates for taxpayers earning over $200,000 ($250,000 for families).
• Continuing most other expiring tax provisions through 2010.

Second, Obama proposes several tax relief provisions, including:

• Making the R&D tax credit permanent;
• Budgeting for a permanent AMT patch;
• Eliminating capital gains taxation on small businesses (although small business is not defined); and
• Expanding the net operating loss carryback (no further details provided).

This budget, unlike usual presidential budgets, lacks detail and is relatively short (only 140 pages long). There is virtually no detail on many of the tax provisions, and they are only mentioned in the revenue tables at the end of the budget. In addition, the revenue estimates for these tax increases are scored differently than previously from House and Senate Committees. For instance, LIFO repeal is scored as raising $61.2 billion, which is much different from the Joint Tax Committee’s revenue forecast from the Rep. Charles Rangel “mother of all tax reforms” bill, which raises $105 billion.

This budget’s tax provisions would be challenging in the best of economic times, and it is ambitious to put forth such large-scale budgetary guidelines right now. The current economic climate makes it more difficult than usual to pinpoint exact budgetary numbers. Regardless, the release of this budget will begin the budgeting process in the House and Senate Budget committees. Over the next several weeks, each house will interpret the president’s budget outline and use it to draft full budget resolutions, with additional details, making them ready for a full vote in each chamber this spring.

It was clear from the president’s address to Congress on Feb. 24 – and his budgetary proposal – that in addition to tax reform, healthcare reform, financial regulation reform and climate change will be at the top of the legislative agenda:

• The budget outline also includes a $250 billion placeholder for further efforts to address the banking crisis on Wall Street;
• Cuts the deficit in half by fiscal 2013;
• Assumes, the creation of a $634 billion reserve fund to cover a health-care expansion paid for by reining in Medicare/Medicaid fraud and tax increases on individuals; and
• The establishment of a $645 billion cap-and-trade system aimed at reducing carbon emissions.

Prepared February 27, 2009 by Cady North, manager, Government Affairs, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.