Obama Administration's Federal Year 2013 Budget Proposal
Council on Foundations Policy Update
February 13, 2012
Obama Budget Again Calls for Cap on Itemized Deductions; Also Would Reinstate Itemized Deduction Phase-Out, Establish "Buffet Rule," and Create a Simplified Excise Tax for Private Foundations
The Obama administration's fiscal year 2013 budget proposal released today includes four provisions relevant to the philanthropic sector. The support for the simplified excise tax and preserving the charitable deduction under the "Buffet" rule are positive developments. Because it is unclear exactly how this support for charitable giving intersects with the continued inclusion of a proposed 28 percent cap and other limits on charitable deductions, the Council will continue to monitor the details as they become available.
1. The president wants to limit the tax value of itemized deductions high-income taxpayers can claim to a maximum of 28 percent, regardless of their marginal tax rate. The proposal is identical to language included in previous Obama administration budgets.
As before, the proposal would apply to married taxpayers filing a joint return with income higher than $250,000 and to single taxpayers with income higher than $200,000. These thresholds would be set "at 2009 levels," and thereafter would be adjusted for inflation. The Obama administration estimates that its proposal to cap the value of itemized deductions, together with limitations on other "tax benefits" for persons with incomes above the specified thresholds, would increase tax revenues by $584 billion over the 10 years from 2013 to 2022.
The Council will continue to oppose a cap on the value of itemized deductions and will be vigilant about any attempts to use this proposal as a revenue source. Although the proposal has virtually no chance to become law prior to the November election, major tax legislation is a distinct possibility in the post-election lame duck session, given the pending expiration of many basic tax code provisions at the end of 2012.
2. The president also has proposed reinstating a limit on itemized deductions that was phased out a decade ago. Reinstating this limitation would reduce the itemized deductions an individual could claim by 3 percent of the amount by which that taxpayer's income exceeded a certain threshold, provided that deductions could not be reduced by more than 80 percent. Though abolished in 2001, the limitation has been scheduled to be reinstated in 2013, and the administration supports letting this occur as scheduled. The administration estimates doing so will raise an additional $123 billion in tax revenue over the next 10 years.
If the limit were in place in 2012, the adjusted gross income floor for the personal exemption phase-out would be $260,500 for married taxpayers filing a joint return and $173,650 for single taxpayers.
3. The administration's FY 2013 budget also includes the "Buffett Rule." The budget overview states that "the president is now specifically proposing that in observance of the Buffett rule, those making over $1 million should pay no less than 30 percent of their income in taxes. The administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions. And he is proposing that the Buffett rule should replace the Alternative Minimum Tax, which now burdens middle-class Americans rather than stopping the richest Americans from paying too little as was originally intended."
No technical explanation of the Buffett rule is given, nor is a revenue estimate provided. However, the "Paying a Fair Share Act of 2012," introduced as S. 2059 by Sen. Sheldon Whitehouse (D-R.I.) and as H.R. 3903 by Rep. Tammy Baldwin (D-Wisc.), would implement a version of the Buffett rule that reportedly was developed with input from the administration. That legislation provides that taxpayers with adjusted gross incomes above a certain threshold who have an effective tax rate below 30 percent would be denied itemized deductions altogether, depending on the presence of other factors.
4. The budget also includes a provision calling for a single, 1.35 percent excise-tax rate on investment income of private foundations. Under current law, private foundations are subject to a two-tiered rate structure that generally imposes a 2 percent rate but that allows a foundation to pay only 1 percent if certain requirements are met. Importantly, the president's budget acknowledges what the Council has long argued: that a single flat rate will "simplify the tax laws and encourage increased charitable activity." Taking simplification one step further, the budget proposes a flat rate of 1.35 percent, rather than the revenue-neutral 1.39 percent that the Council has been advocating. The administration estimates that the proposal would result in the loss of $54 million in tax revenues over 10 years.
Materials prepared by the White House detailing its fiscal year 2013 budget proposal, including the proposal to limit the value of itemized deductions, may be found at the following links: