President Obama proposed on September 12 the American Jobs Act of 2011 (the "Jobs Act"), a stimulus bill that provides a mixture of tax cuts, spending provisions, and revenue raisers, including significant temporary reductions to payroll tax rates. On September 19, the Jobs Act was followed by the President's Plan for Economic Growth and Deficit Reduction (the "President's Deficit Reduction Plan") which was sent to the Joint Select Committee on Deficit Reduction (the "Super Committee") outlining tax reform proposals and spending cuts aimed at reducing the deficit and raising revenue, including the funding needed for the Jobs Act's stimulus provisions.
The President's Plan would produce $4.4 trillion in deficit reduction net the cost of the Jobs Act. The tax changes outlined in the Jobs Act would raise in $1.57 trillion of this amount, including $866 billion from an expiration of the 2001 and 2003 tax cuts for high-income earners, implementation of reforms comporting with the "Buffett Rule" that people making more than $1 million a year should not pay less taxes than middle class families, $410 billion from limiting deductions for high-income earners, and $300 billion from eliminating certain "special interest tax breaks".
The White House hopes to obtain bi-partisan approval of these changes by stating such tax reform is needed to make the United States more competitive and to facilitate a lower corporate tax rate which will make the United States a more attractive place to do business. Republicans have initially indicated opposition to some of the revenue raisers contained in the Jobs Act in addition to the President's Deficit Reduction Plan, but have indicated that certain pieces of the proposed Jobs Act may be taken up in the House. The President has indicated that he would veto any bill that reduces Medicare benefits without raising taxes on higher income individuals.
The specific tax law changes proposed in the Jobs Act, discussed in more detail below, are as follows:
Tax Relief Provisions
- Temporary Payroll Tax Relief for Individuals and Small Businesses
- Tax Relief for Businesses, Including Extension of 100 Percent Bonus Depreciation
- Tax Credits for Employers Who Hire Veterans or Unemployed Workers
- Extension of Exemption from AMT Treatment on Tax-Exempt Bonds
- 28 percent Limitation on Deductions for High-Income Taxpayers
- Partnership Interests Transferred for Services Classified as Ordinary Income; Carried Interest
- Repeal of Accelerated Depreciation for Corporate Jets
- Elimination of Certain Oil and Gas Preferences
Temporary Payroll Tax Relief
- The most significant stimulus provision is a temporary reduction in payroll tax rates. For the calendar year 2012, the Jobs Act would reduce Social Security payments by the employee from 4.2 percent to 3.1 percent and payments by the employer from 6.2 percent to 3.1 percent (the employee portion is scheduled to return to the normal rate of 6.2 percent on January 1, 2012, if the Jobs Act is not passed). The employer reduction applies to the first $5 million of wages. This payroll tax reduction would generally be available to all private and tax-exempt business, but would not be available to Federal, State and local government employers (apart from State colleges and universities) or with respect to household workers. The payroll tax reduction would also apply self-employed individuals.
- For the last quarter of 2011 and the calendar year 2012, the Jobs Act also would provide an employer payroll tax credit on Social Security tax payments made on any payroll increases from the prior year. The employer credit would apply to the first $50 million of increased wages. This payroll tax credit would generally be available to all private and tax-exempt business, but would not be available to Federal, State and local government employers (apart from State colleges and universities) or with respect to household workers.
Tax Relief for Businesses
- To encourage businesses to make capital investments, the Jobs Act would expand the current temporary accelerated depreciation rules for qualified property through the end of 2012. Businesses would be allowed to immediately deduct 100 percent of the cost of qualified property placed into service in 2012. Under current law, this temporary bonus depreciation currently will be reduced to 50 percent for 2012.
- Until the end of fiscal year 2012, the Jobs Act also would increase the Small Business Administration surety bond guarantee amount from $2 million to $5 million.
- The Jobs Act would delay the effective date to January 1, 2013 a 3 percent withholding on payments for goods and services made by federal, state, and local governments to government contractors. The 3 percent withholding provision otherwise will be effective on January 1, 2012.
Tax Credits for Employers Who Hire Veterans or Unemployed Workers
- The Jobs Act, while not giving an effective date for these provisions, would provide several tiers of credits for employers who hire veterans, giving the largest credit of $9,600 to employers who hire veterans that have been unemployed for at least 6 months and have service-connected disabilities. If employers hire veterans that have no service-related disabilities, the Jobs Act would provide a credit of $2,400 for employers who hire veterans who have been unemployed for at least 4 weeks, and a credit of $5,600 for veterans who have been unemployed for at least 6 months.
- Employers, including tax-exempt entities and public universities, would receive a maximum tax credit of $4,000 if they hire a worker who has been unemployed for at least 6 months.
Extension of Exemption from AMT Treatment on Tax-Exempt Bonds
- The Jobs Act would exempt interest on tax-exempt private activity bonds issued in 2011 or 2012 from the Alternative Minimum Tax ("AMT"), extending the temporary AMT exemption on private activity bonds that expired on December 31, 2010.
The Jobs Act contains $467 billion in proposed revenue raisers to pay for the $447 billion jobs creation portion of the Jobs Act. If the Super Committee achieves in addition to its current $1.5 trillion target, then the revenue raisers discussed below would not go into effect.
28 Percent Limitation on Deductions for High-Income Taxpayers
The most broadly applicable and significant revenue raiser would be a limitation on deductions for high-income taxpayers. Beginning on January 1, 2013, deductions for high-income taxpayers (adjusted gross income of $250,000 married filing jointly and $200,000 for single taxpayers) would be limited to 28 percent of the total deduction. This also would apply to AMT taxpayers. Under current law, these taxpayers are allowed deductions against their full maximum tax rate of 35 percent.
Partnership Interests Transferred for Services Classified as Ordinary Income; Carried Interest
The proposal would tax the gain from sale of certain profits interests in partnerships received in exchange for services ("carried interest") as ordinary income. Similar to prior carried interest proposals, the Jobs Act would recharacterize the income from the sale of an "investment services partnership interest" ("ISPI") as ordinary income. In addition, social security and Medicare taxes would apply to amounts recharacterized as ordinary income. Partnership interests allocated based on capital invested, even if granted to an investment services partner, would generally still receive capital gains treatment. This provision would be effective after December 31, 2012.
Repeal of Accelerated Depreciation for Corporate Jets
The Jobs Act would eliminate the current accelerated depreciation allowed for corporate jets. Effective after December 31, 2012, corporate jets would be depreciated as 7-year property at the same rate as other aircraft.
Repeal of Certain Oil and Gas Tax Preferences
The Jobs Act would trim down the deductions and credits available to the oil industry. These tax increases generally would be scheduled to go into effect after December 31, 2012, if the Jobs Act is passed.
- Capital Expense Treatment for Intangible Drilling and Developments Costs ("IDCs"). IDCs would be capitalized as depreciable or depletable property depending on the nature of the cost incurred, in accordance with generally applicable rules. Currently IDCs are deductible or amortizable over a 60-month period.
- Repeal of Deductions for Tertiary Injectants Expenses. The Jobs Act would repeal the deduction allowed for tertiary injectant expenses.
- Cost Depletion, not Percentage Depletion, Allowed for Oil and Gas Wells. The Jobs Act would repeal the percentage depletion method (in which the amount of the deduction is a statutory percentage of property's income) for oil and gas wells. Under the Jobs Act, taxpayers would be permitted to claim cost depletion on their adjusted basis for oil and gas wells.
- Manufacturing Deduction Denied for Oil, Natural Gas or Primary Products. The Jobs Act would deny the section 199 manufacturing deduction for income made by the sale, exchange or disposition of oil, natural gas or primary products.
- Repeals the Oil and Gas Working Interests Exception From Passive Loss Rules. The Jobs Act would repeal the oil and gas working interests exception from the passive loss rules.
- Uniform Seven-Year Amortization Schedule for Oil and Gas Exploration Expenditures. The Jobs Act proposes to increase the amortization period of oil and gas exploration expenditures incurred by independent producers from two years to seven years. This would apply even if the oil or gas property is abandoned.
- Repeal of Credit for Enhanced Oil Recovery ("EOR") Projects. The Jobs Act would repeal the 15 percent credit currently available for EOR costs, including costs of constructing a gas treatment plan to prepare Alaska natural gas for pipeline transportation.
- Repeal of Credit for Oil and Gas Produced From Marginal Wells. The Jobs Act also would repeal the marginal oil and gas wells production credit.
- Modification of Foreign Tax Credit ("FTC") for Dual Capacity Taxpayers. The Jobs Act would allow dual-capacity taxpayers a maximum FTC amount equal to the FTC amount the taxpayer would be eligible for were it not a dual-capacity taxpayer. This provision did not include an effective date.
- Separate Foreign Tax Credit Basket for Oil and Gas Income. The Jobs Act would create a separate foreign tax credit category for FTCs from foreign taxes paid on foreign oil and gas income, preventing oil and gas companies from blending high-tax foreign oil income with other low-tax income. There was no effective date specified in the Jobs Act.
The President's Proposed Deficit Reduction Plan
The President's Deficit Reduction Plan emphasized the tax changes proposed in the Jobs Act, and also listed the following prior tax reform proposals put forward in the General Explanations of the Administration's Fiscal Year 2012 Revenue Proposals (the "Greenbook") (and in prior fiscal year Greenbooks):
- Repeal the last-in, first-out ("LIFO") method of accounting for inventories;
- Repeal the lower-of-cost or market inventory method;
- Alter the treatment of insurance companies and products;
- Alter the dividends received deduction for insurance companies;
- Disallow interest expenses for corporate-owned life insurance;
- Defer the deduction of interest expense on deferred foreign-source income;
- Pool foreign tax credits;
- Tax excess returns associated with transfers of intangibles offshore currently;
- Clarify the definition of intangible property for purposes taxing intangibles expatriations to include workforce-in-place, goodwill, and going concern value;
- Reinstate Superfund taxes;
- Permanently extend the 0.8 percent unemployment tax; and
- Allow the IRS to issue guidance on worker classification.
In addition, the President's Deficit Reduction Plan called for the Super Committee to undertake comprehensive tax reform based off of the following five principles:
- Lower tax rates;
- Cut wasteful loopholes and tax breaks;
- Reduce the deficit by $1.5 trillion;
- Boost job creation and growth; and
- Comport with the "Buffett Rule" that people making more that $1 million a year should not pay less taxes than middle-class families.