Obama Targets Tax Breaks To Pay For Jobs Programme

by Mike Godfrey, Tax-News.com, Washington

14 September 2011

The bill which President Barack Obama has sent to the United States Congress, giving effect to his USD447bn package of tax cuts and federal infrastructure spending, includes tax break reductions and an offset trigger for the Joint Select Committee on Deficit Reduction.

Apart from increased funds for America’s infrastructure and schools, and an extension of the emergency unemployment compensation programme and extended benefit provisions, at the centre of the American Jobs Act is a reduction in federal revenues by USD240bn by way of cuts in employee payroll taxes in 2012.

There are also tax credits for the longer-term unemployed, and for veterans and workers with service-connected disabilities, and Obama has proposed extending 100% bonus depreciation for businesses for an additional year, allowing businesses to immediately deduct 100% of the cost of qualified property through the end of 2012.

To ensure that the American Jobs Act is fully paid for, the President had said that he would call on the Joint Select Committee, that is currently formulating a plan to reduce the aggregate deficit over the next decade by a further USD1.5 trillion, to come up with the additional deficit reduction necessary to pay for the Act and still meet its deficit target.

In fact, the proposed legislation also includes increased target and trigger clauses for the Joint Select Committee on Deficit Reduction to act as a backstop to pay for the jobs creation provisions of the bill. If the Committee achieves additional savings in the amount of the cost of these job creation provisions, the offsets do not take effect.

In addition, however, the President has also included in the bill other offsets of his own, including a proposed limitation to the value of all itemized deductions and certain other tax expenditures for high-income taxpayers. This provision would limit the value of all itemized deductions and certain other tax expenditures for high-income taxpayers by limiting the tax value of otherwise allowable deductions and exclusions to 28%. No taxpayer with adjusted gross income under USD250,000 for married couples filing jointly (or USD200,000 for single taxpayers) would be subject to this limitation, but it would affect itemized deductions and certain other tax expenditures that would otherwise reduce taxable income in the 36% or 39.6% tax brackets.

A similar limitation would also apply under the alternative minimum tax, and the restriction would be effective for taxable years beginning on or after January 1, 2013.

In addition, the President would close the current provision that allows corporate jets to be depreciated faster than jets used by airlines to carry passengers, requiring corporate jets to be depreciated over the same number of years as other aircraft (effective for taxable years beginning after December 31, 2012).

The legislation would also repeal a number of tax deductions and credits for the oil and gas industry, including the special deduction for intangible drilling and development costs for oil and gas wells; the percentage depletion method for recovery of the capital costs of oil and gas wells; the deduction with respect to income attributable to domestic production activities (the manufacturing deduction) for oil and gas production; and the credit available under existing law for crude oil and natural gas produced from marginal wells. These deductions and credits would not be available, generally, after December 31, 2012.

While the Republican Speaker of the House of Representatives, John Boehner, had, before the publication of the bill’s text, appeared conciliatory, expressing “a desire to seek common ground on removing barriers to private sector job creation,” and saying that “the proposals the President outlined merit consideration," the President’s attempt to resurrect what the Republican party is likely to look on as tax hikes for higher-income individuals and the oil and gas industry will probably be considered extremely unfavourably.

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