Washington News

On Nov. 16, President Obama met with Congressional leaders of both parties to open negotiations over the fiscal cliff scheduled for January of 2013. Speaker of the House John Boehner (R-OH), Minority Leader Nancy Pelosi (D-CA), Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY) attended the meeting.

President Obama opened the meeting by noting, "My hope is this is going to be the beginning of a fruitful process, that we're able to come to [an] agreement that will reduce our deficit in a balanced way, that we will deal with some of these long-term impediments to growth and [that] we're also going to be focusing on making sure that middle-class families are able to get ahead."

In a news conference this week he emphasized an interest in moving forward with tax increases on those with higher incomes. However, he suggested an openness to considering alternatives to raising the top tax rates to 36% and 39.6% and the top capital gains rate from 15% to 20%. Any options advanced by Congressional leaders must match the intended $1 trillion or more in new taxes from upper-income persons.

At a press conference following the meeting, both parties described the event as "constructive." Speaker Boehner and Leader McConnell suggested a willingness to consider revenue increases. Leader Pelosi stated that a compromise on revenue and spending limits was possible by Christmas.

Boehner noted, "While we're going to continue to have revenue on the table, it's going to be incumbent on my colleagues to show the American people that we're serious about cutting spending and solving our fiscal dilemma. I believe we can do this and avert the fiscal cliff that is right in front of us today."

Editor's Note: White House officials are reportedly developing a targeted group of budget cuts to replace the scheduled $109 billion in "sequestration." If the fiscal cliff occurs, the major reductions in 2013 would be $55 billion in defense spending, $11 billion for Medicare and $43 billion in education and other non-defense services.

Potential Tax Increases on Upper-income Taxpayers

The nonpartisan Committee for a Responsible Federal Budget (CRFB) published a report on Nov. 15 that outlines the major proposals for tax increases. Tax changes proposed by President Obama are estimated to raise $1 trillion over ten years. Generally, the increases apply for taxpayers with incomes over $250,000.

Potential Revenue From Tax Increases 2013 to 2022

Tax Increase	2013	2013 to 2022
Top Rates to 36% and 39.6%	$31B	$493B
Pease Itemized Deductions 3% Floor	$7B	$111B
Phase-Out Personal Exemptions	$3B	$40B
Capital Gains Rate 20%	$7B	$57B
Dividends Taxed as Ordinary Income	$10B	$104B
Estate Tax $3.5M Exemption/45% Rate	$9B	$135B
Other Tax Increases	$20B	$240B
Total Increased Revenue	$87B	$1,080B

CRFB also described three alternatives to these tax increases. The alternatives are designed to produce approximately the same level of tax increases for upper-income persons ($1 trillion over ten years).

1. Itemized Deduction Cap – There could be a limit of $25,000 on itemized deductions for persons with incomes over $250,000. For those with incomes over $500,000, there would be no permitted itemized deductions.
2. Cap on Tax Expenditures – This option raises capital gains rates to 28% and eliminates the state and local taxes itemized deduction. Other itemized deductions may be subject to specific limits.
3. Limit Deduction Value to 28% – President Obama has proposed that upper-income taxpayers in the current 33% and 35% brackets would receive tax savings only at the 28% bracket for all itemized deductions. Total itemized deductions could also be phased out to zero for taxpayers with incomes over $1 million.

The nonpartisan Tax Policy Center (TPC) also published an analysis this week to show the revenue increases if there is a cap on itemized deductions of either $25,000 or $50,000, but excluding charitable contributions. The current 50% of adjusted gross income limit on charitable deductions is maintained under that analysis.

Editor's Note: Your editor and this organization take no specific position on any of these tax-increase options. However, the TPC study is very encouraging for philanthropy. Many members of Congress understand that the charitable deduction is different from other itemized deductions. It is both voluntary and helps others rather than the taxpayer. For this reason, there is a reason for excluding itemized charitable deductions from other limits.