WHITE HOUSE PROPOSES $1.4 TRILLION
IN TAX CUTS IN FY 2006 BUDGET
While encouraging the
recently appointed tax reform panel to move
quickly on major changes, the Bush Administration
is also continuing to march forward to
significant revision of the Tax Code in
increments each year. President Bush’s
just-released fiscal year (FY) 2006 federal
budget proposes tax cuts totaling $1.4 trillion.
Permanent
tax cuts
The biggest share of the
Administration’s tax budget is devoted to
making permanent to the tax cuts from the
Economic Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA)and Jobs and Growth Tax Relief
Reconciliation Act of 2003 (JGTRRA). These
measures, which would cost $1.1 trillion over the
next 10 years, include:
Permanent reductions in
marginal income tax rates (scheduled to sunset on
December 31, 2010);
Permanent repeal of the
federal estate tax and the generation-skipping
transfer tax (scheduled to sunset on December 31,
2010);
Permanent reductions in
the current dividends tax rate and capital gains
tax rate structures (both schedule to sunset on
December 31, 2008); and
Permanent status for the
$1,000 child tax credit (scheduled to sunset to
$500 after 2010.
Health
incentives
The proposed budget also
includes $125.3 billion of tax breaks for health
care expenses. The centerpiece is a new
refundable income tax credit for purchasing
health insurance. Known as the health
Insurance Tax Credit, it would subsidize 90
percent of insurance premiums up to $1,000 per
adult and $500 per child for up to two children,
subject to an AGI phaseout.
The White House also
proposes an above-the-line tax deduction for
high-premium insurance plans. In addition,
a refundable credit would be provided to small
businesses that contribute up to $200 to an
employee’s health savings account for
themselves and $500 for a family.
Pension
reform
Several pension reform
proposals are designed to shore-up defined
benefit plans. These measures include the
use of interest rates based on high-quality
corporate bonds to determine pension liabilities
and basing minimum contributions on the financial
health of a sponsor.
Tax-favored
savings accounts
The Administration
continues to recommend more tax-deferred savings
opportunities. They include:
Retirement Savings
Accounts: These accounts would consolidate
several types of IRA’s into a single
account. Contributions would be taxed but
earnings would not and funds could only be used
for retirement purposes.
Lifetime Savings Accounts:
Contributions to these accounts would be taxed,
but would generate tax-free earnings that could
be used for any purpose.
Employer Retirement
Savings Account: These accounts would combine
defined contribution accounts such as 401(k) and
403(b) plans.
Loophole
closing
The Administration also
asks Congress for more money and authority to
combat abusive transactions. These measures
include:
Giving Treasury authority
to address transactions that involve
“inappropriate” separation of foreign
taxes from the related foreign income;
Tightening the active
trade or business requirement for tax-free
spin-offs to guard against non-prorata
distribution of investment assets;
Imposing penalties on
charities that fail to enforce conservation
easements;
Eliminating special
exclusions for the sale of brownfield properties;
An excise tax to prevent
abusive transactions involving life insurance and
exempt entities; and
Tightening of the
limitation on the deductibility of interest paid
to related persons.
Old
favorites
Familiar items in the
Administration’s wish list for tax
legislation this year include:
Making permanent
the research and experimentation tax credit;
Extending the
work opportunity and the welfare-to-work tax
credits, as well as the deduction for corporate
donations of computer technology;
Extending and enhancing
the above-the-line deduction for out-of-pocket
classroom expenses.
Permitting tax-free IRA
withdrawals for charitable contributions; and
Enhancing energy
production and conservation tax credits.
Reserved
for tax reform panel
Notably absent from this
year’s budget proposal is any AMT
relief. OMB Director Joshua Bolten
explained that the Administration expects the tax
reform panel to deal with AMT reform, hopefully
making another temporary patch unnecessary.
If needed, a temporary extension of the present
2005 AMT exemption amounts could be passed
anytime before the 2007 filing season.
An above-the-line
deduction for charitable contributions is also
missing from this year’s Administration
proposals because of expectations it will be part
of major tax reform legislation later this year.
IRA
funding
The proposed IRS budget
for fiscal year (FY) 2006 includes an increase of
$500 million for enforcement. The
Administration requests $10.679 billion for the
over-all IRS budget, an increase of 4.3 percent
over the FY 2005 budget of $10.236 billion
approved by Congress.
The proposed $6.892
million budget for enforcement would be an
eight-percent increase over the approved FY 2005
budget. The enforcement budget includes:
$3.7 billion for
audits and computer matching;
$2 billion for
collections; and
$767 million for
investigations that target abusive schemes and
scams, fraudulent refund schemes and illicit
activity, such as money laundering.
Comment. IRS
Commissioner Mark Everson said in a statement
that the additional enforcement funds “will
be used to increase audits of corporations and
high-income individuals, as well as expand
collection and criminal investigation
efforts”. He added that enforcement
funds yield better than a 4 to 1 return.
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