President Obama’s Fiscal 2014 Budget: What It Means for Tax Policy
This week, President Obama plans to unveil his fiscal year 2014 budget. More than two months late, the budget is expected to include many of the same (or similar) tax proposals seen in previous years along with a few additions. With the current focus on the impact of sequestration, the looming battle over raising the debt ceiling, and the ongoing discussions around tax reform, what will the president’s budget mean for manufacturers in terms of tax policy?
“Not much,” many in Washington will say. The president’s budget is arriving after both the House and Senate have passed their own budget bills, and it will propose additional tax revenue by limiting tax deductions for some taxpayers at a time when House Republicans are saying they will not accept any tax increases. What is different this year, however, is that the president is expected to include Republican-supported changes to entitlement programs. The tone is different, with the president offering up compromises unpopular among Democrats in an effort to strike a broader deficit-reduction deal.
House Ways and Means Committee Chairman Dave Camp (R-MI) and Senate Finance Committee Chairman Max Baucus (D-MT) seem to be ignoring the conventional wisdom that tax reform is dead this year and have been pressing ahead on the issue; on Sunday, they penned a joint op-ed on their tax reform efforts. The House and Senate tax-writing committees will hold hearings on the president’s budget proposal on April 11, and April 15 is the deadline for submitting comments to the tax reform working groups Chairman Camp established earlier this year. Industry groups and new coalitions continue to ramp up efforts, a sign of continuing momentum for tax reform. With the president scheduled to have dinner with Republicans hours after the budget’s release, perhaps this year’s proposal has a chance of setting the tone for a grand bargain budget deal that includes tax reform.
Even if the president’s budget goes nowhere, it is important to examine what is ahead. The budget’s tax proposals lay out the president’s priorities and could serve as a possible a la carte menu of both pro-growth incentives and revenue raisers that could be included in tax reform legislation or unrelated legislation. This is particularly true with respect to the budget’s revenue-raising items.
Fortunately for the manufacturing community, the president is expected to continue his drumbeat for strengthening the sector. Unfortunately, multinationals will likely still be a target for revenue.
- Research & Experimentation Credit: Expect to see the president propose a stronger and permanent research and experimentation tax credit. This has been in his past budget proposals, as well as in last year’s Framework for Business Tax Reform. A stronger and permanent credit was also mentioned in the president’s plan to revitalize U.S. manufacturing, introduced in February. As 70 percent of the credit is used by manufacturers, and it is available only for R&E performed in the United States, strengthening the credit would make it more competitive with incentives offered by other countries, and making it permanent would provide much-needed certainty for manufacturers.
- Lower Corporate Rate: Last year’s Framework for Business Tax Reform also included a proposal to lower the corporate tax rate to 28 percent—25 percent for manufacturers. Considering that lowering the rate is popular with both Republicans and Democrats, a related measure is likely to be in the FY 2014 budget proposal; this change would better align us with OECD countries.
- Manufacturing Communities Credit: The president’s recently announced manufacturing plan includes an incentive for communities with concentrated job losses to encourage new investment and job creation. Although the details of such a measure would need to be worked out, it appears that this credit would be structured similarly to the new markets tax credit. The administration has indicated that this credit will be in the budget.
- Bonus Depreciation: The president’s previous budget proposals called for an extension of 100 percent bonus depreciation, allowing for faster recovery of costs for qualified assets; this is likely to be represented again.
- Wind Production Credit: Extension of this credit for wind facilities and certain other renewable energy facilities will probably appear in the president’s FY 2014 budget.
- Advanced Energy Manufacturing Tax Credit: The president will likely call for reauthorization of the Section 48C advanced energy manufacturing tax credit, which allows for a 30 percent credit on investments in manufacturing facilities for clean energy technologies.
- International Tax Rules: Just as the R&E credit is a perennial favorite, so are the administration’s proposals targeting the overseas earnings of multinational companies. These revenue-generating proposals generally target tax credits, deferral—a feature of U.S. tax law created for the purpose of allowing companies to compete—and other selective changes. These types of changes ignore the realities of the global economy and put U.S. manufacturers at a competitive disadvantage. Previous budget proposals have modified some of the provisions, but a few of the key proposals likely to be included once again would:
- Defer the deduction of interest expense related to deferred income of foreign subsidiaries;
- Determine the foreign tax credit on a pooling basis;
- Tax currently excess returns associated with transfers of intangible property offshore; and
- Limit the shifting of income through intangible property transfers.
- Minimum Tax on Overseas Earnings: Although not included in previous budgets, the president has introduced the idea of establishing a minimum tax on overseas earnings. This was part of his Framework on Business Tax Reform and was discussed as part of his plan to revitalize manufacturing. Including this proposal in the FY 2014 budget would be consistent with previous proposals seeking to curtail tax deferral.
- LIFO Repeal: “Last in, first out” is an accounting method generally used to manage the costs of inflation. The president has previously introduced repealing the LIFO method, a move that would hurt manufacturers holding inventory.
- Oil and Gas: With the increased focus on renewable energy, it is probable that the president will again propose eliminating incentives for the oil and gas industries, such as the Section 199 domestic manufacturing deduction.
This list is certainly not complete, but is intended to cover some of the key proposals expected this week. The focus on manufacturing will undoubtedly be welcome and the list of positives will likely be lengthy; however, the revenue raisers, if similar to those in years past, would be devastating to the competitiveness of U.S. manufacturers, both those operating globally and as flow-through entities. Any changes to business taxation rules should not be made on a piecemeal basis; Congress and the administration must ensure that any changes bolster—rather than detract from—manufacturers’ ability to create jobs, innovate, and compete globally.