Obama Tax Plan Tackles Budget Issue With Political Hurdle – Bloomberg

President Barack Obama’s proposal to spend one-time revenue generated by a rewrite of the business tax system addresses a budget problem and causes political ones.

In Obama’s plan, which he plans to discuss in a speech today in Tennessee, that revenue would be spent instead of dedicated to pay for lower tax rates. Otherwise, the federal budget deficit would rise later when the temporary revenue increase ran out.

“That money can’t responsibly be used to lower rates because it doesn’t sustain itself,” Gene Sperling, the director of the White House National Economic Council, told reporters on a conference call today.

The proposal drew an immediate rebuke from Republicans in Congress who said it would amount to unacceptable increases in U.S. taxes and spending.

Obama today altered his longstanding support for revenue-neutral changes to business taxation. Instead, he plans to say that one-time revenue from taxing accumulated overseas earnings or changing depreciation schedules should be spent instead of being used to reduce tax rates. Sperling declined to say how much money those changes would generate.

“It represents an unmistakable signal that the president has backed away from his campaign-era promise to corporate America that tax reform would be revenue-neutral to them,” said Senator Mitch McConnell of Kentucky, the Republican leader.

Obama supports reducing the corporate tax rate to 28 percent for most companies and 25 percent for manufacturers, down from 35 percent today.

Tax Breaks

He would pay for those changes by curtailing tax breaks, perhaps including the ability to deduct interest and limits on large businesses that now pay taxes through their owners’ individual tax returns.

By calling for revenue-raising tax changes, Obama is wading into a debate in Congress that makes a tax overhaul more difficult.

Republicans, led by House Ways and Means Committee Chairman Dave Camp of Michigan, want a revenue-neutral revision of the individual and corporate tax systems. Democrats are pushing Senate Finance Chairman Max Baucus of Montana to include in his plan as much as $975 billion in new revenue from individuals and companies.

Both Camp and Baucus plan to push legislation through their committees this year.

Obama’s proposal is an attempt to address a complication inherent in some plans to change the tax code.

Offshore Earnings

Under congressional scoring rules, lawmakers could rely on one-time revenue — from taxing offshore earnings and changing depreciation schedules — to pay for permanent tax cuts.

That’s what Camp has suggested on international taxation — using a one-time, 5.25 percent tax on accumulated offshore earnings to pay for a system that would exempt most foreign income of U.S.-based multinational companies.

Under Camp’s plan, companies would have eight years to pay the tax. The tax cuts would continue after that time runs out, near the end of the 10-year budget scoring window.

The international transition tax at Camp’s rate of 5.25 percent, applied to all $2 trillion in earnings held offshore by U.S. companies, would yield as much as $105 billion in one-time revenue.

“If one were to do corporate tax reform that was revenue-neutral or raised some money in the first 10 years, but started to lose money in the second 10, third 10 years, you’re making the problem worse,” said Chuck Marr, federal tax policy director at the Center on Budget and Policy Priorities. The Washington group favors proposals that aid low-income families.

‘Hybrid’ System

Sperling said Obama hasn’t changed his position on what the international tax system should look like. Obama supports a global minimum tax and what Sperling described as a “hybrid” system.

In the current tax system, American companies owe U.S. taxes on all the income they earn around the world. They can receive tax credits for payments to foreign governments and don’t have to pay the U.S. until they repatriate the money.

“What the president has been for is to have a sounder hybrid system that has the right incentives for investment in job creation in the United States,” Sperling said. “So the president has not changed his basic principles there.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net