Obama's Budget Plan Complicates Talks on Corporate Tax Overhaul - BusinessWeek

February 15, 2011, 12:05 AM EST By Ryan J. Donmoyer and Richard Rubin

(See {EXT2 } for more on the budget.)

Feb. 15 (Bloomberg) -- President Barack Obama renewed his call to raise taxes paid by U.S.-based multinational corporations and oil and gas companies, complicating efforts to overhaul the corporate tax code this year.

The president, in a $3.7 trillion budget plan released yesterday in Washington, revived dozens of proposals that Congress has rejected, including $129 billion in higher taxes on the overseas profits of U.S. companies. He also proposed changing the tax treatment of oil, gas and coal companies, which would raise about $46 billion.

The proposals revived opposition from businesses. They had been looking for a signal of a friendlier tax stance.

“There was the hope they would consider some of the arguments and concerns that were raised by the multinationals” after Obama included similar proposals in his first two budgets, said Lindy Paull, a partner at PricewaterhouseCoopers LLP in Washington.

Obama and Treasury Secretary Timothy Geithner in the past few months have held a series of meetings with corporate executives, who have pushed for reducing taxes on global profits rather than increasing them.

‘Fundamental Changes’

“There is disappointment that those proposals were not revised and that they’re continued to be labeled loophole closers when they are pretty fundamental changes to the tax code,” Paull said. “People have spent a lot of time and effort trying to discuss that with the administration.”

Michigan Representative Dave Camp, a Republican who would play a pivotal role in any rewrite of the tax code as chairman of the House Ways and Means Committee, blasted Obama’s proposals.

“Rather than setting the stage for broad-based, pro-growth tax reform, this budget goes in the opposite direction with more tax hikes,” Camp said.

The proposal also would bring back pre-2001 tax rates on income and capital gains for individuals earning more than $200,000 annually and married couples making more than $250,000. The estate tax would return to 2009 levels with a $3.5 million per-person exemption and a 45 percent top rate. Under a law Obama signed in December, lower rates expire at the end of 2012.

“The president was unable to reverse the Bush tax cuts this past year with a majority in each house of Congress, so it’s very difficult to see how he will be successful over the next two years with the Republicans firmly in control of the House,” said Neal Weber, managing director in charge of RSM McGladrey’s Washington national tax office.

Limits on Deductions

The budget plan would limit itemized deductions for top earners to 28 percent, curbing the value of tax breaks for charitable contributions, home mortgage interest and state and local taxes. That proposal has been included in every budget of Obama’s presidency and was rejected as a revenue-raising provision to fund his overhaul of the health system last year.

Under the budget’s assumptions, federal revenue as a percent of the economy would increase from 14.9 percent in 2010 to 20 percent in 2021. Part of that increase stems from projected economic growth, not from policy changes.

A key Senate Republican also criticized the tax increases in the budget.

“This budget fails to preserve the pro-growth policies needed to expand our economy, create jobs and reduce the deficit,” said Senator Orrin Hatch of Utah, the top Republican on the Finance Committee.

Administration officials said the budget is balanced with proposals favorable to business, such as making permanent a tax credit for conducting research.

Tax Incentives

Obama proposed an array of other tax incentives. They include the elimination of capital gains on some small business stock and one to revive the Build America Bonds program, which expired at the end of 2010.

The budget also proposes converting a deduction for energy- efficient buildings into a credit. Obama wants to extend a provision expiring at the end of 2011 that allows certain energy tax credits to be converted into grants.

Instead, many in the business community are focusing on renewed proposals to place limits on multinational companies’ ability to defer income taxes on profits they earn outside the U.S. These plans have drawn criticism from corporations such as Microsoft Corp. and Cisco Systems Inc.

The budget also revives a proposal that Congress require executives of investment partnerships including private-equity firms to pay ordinary tax rates on the profits they receive as compensation. This pay, known as carried interest, currently can qualify for lower capital gains tax rates. The proposal would raise $14.8 billion over 10 years.

--Editors: Jodi Schneider, Jim Rubin.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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Brown promises austere budget at forum focused on education - San Jose Mercury News

SACRAMENTO -- Gov.-elect Jerry Brown had some words of advice for those gearing up for the budget he will propose next month: "Please sit down if you're reading the stories on the budget on Jan. 10. If you're driving, fasten your seat belt because it's going to be a rough ride."

That much has been evident from the hard truths Brown continued to unleash Tuesday at UCLA during a forum focusing on where education fits in the state's overall revenue picture. It was his second budget forum in seven days, and Brown made it clear that few people will emerge unscathed as the Legislature seeks a way out of a potential $28.1 billion hole.

After being cheered at the start of the forum, Brown said, "I don't know if you'll be cheering after the budget comes out."

But Brown also telegraphed what some took to be hints that he is laying the groundwork to take a tax hike initiative to voters in the spring.

"I think the signals are clear that he'll push through an austerity budget with an all-cuts budget early in the year, and he'll say if you don't like it, here are the revenues we need," said Robert Cruickshank, editor of the liberal Calitics.com blog.

Brown said he wanted to complete the budget in 60 days, saying, "I don't think we have a lot of time to waste" -- a hint suggesting that he would like to allow the bad news of harsh cuts time enough to sink into voters' minds before a spring special election.

"Where

I see openings that will pave the way for positive initiative, then I'm going to lead the charge," Brown said. "But I'd want to do it very carefully and very thoughtfully because I want to make sure we succeed."

Brown even drifted into soliloquies that warmed the hearts of liberals, referring to California's deficit as a fraction of the state's overall wealth and talking about the harmful effects of the "redistribution" of income to the wealthy.

"Income redistribution that's occurred upward from the middle class and below is now at a level comparable to pre-Depression 1920s," he said. "So what we are facing is not only a budget deficit. We're facing a societal crisis, and we will only resolve it as we understand it and we work not only to exercise a discipline, which has been sadly lacking, but also a fairness that enables everybody to feel they have an honest stake in the whole society. That's the larger picture here."

He called the current era, with widening gaps between the wealthy and middle class, "a very difficult period. We've never had it before. It may be worse than the Depression in terms of political pressures, the tearing of the social fabric."

Those who are the most privileged, he said, "really have to take the lead" in resolving the fiscal crisis. He said that group includes government agencies, which can do "a lot more with less."

Education officials urged Brown to seek tax increases to lift a downcast education system that has taken $17 billion in general fund cuts over the past two years.

"Temporary taxes need to be extended," said Joel Shapiro, superintendent for South Pasadena schools. "Absolutely, we can't do without revenues. We need to educate the voters of California "... that the only way to keep the education system from deteriorating worse is to increase revenues, taxes or fees."

But Brown appeared slightly miffed at the tone Shapiro took toward voters.

"You say we've got to educate them -- in some ways, they've got to educate us," Brown said. "It's not really a we/them. It's society. There's a lot of hostility to government. They look at the city of Bell, they pick up the paper and see firefighters getting a $250,000 pension. There's a lot of skepticism about government in the political process. That's a reality and we have to take the world as we find it and we have to work through it."

James Johnson, a Long Beach councilman, asked Brown how he intends to figure out the contradiction voters have between their desire to fully fund schools and their hostility to taxes.

Brown answered, partly in jest: "That's why we're here -- we're hoping one of you people will come up with it. We didn't gather here just to hear ourselves speak."

One dilemma, he said, was that the state tries to make sense out of competing outlooks from regions that have little in common -- an argument, he said, for shifting many of the state's responsibilities to local governments.

"When we take so many local decisions and put them all at the state Capitol, then we have all these different perceptions working on the problem," he said. "That's why we get a lot of breakdown and gridlock. Because people see the world differently."

One indication of how he'd like to "offload costs" from state to local: There are 45,000 inmates who are incarcerated for 90 days or fewer in state prisons who he said could be housed in county institutions at a lower cost.

Contact Steven Harmon at 916-441-2101.

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Details emerge on no-tax California budget pact - The Associated Press

Details emerge on no-tax California budget pactBy DON THOMPSON (AP) – 37 minutes ago

SACRAMENTO, Calif. — After a record-long impasse, California legislators are set to vote this week on a no-new-taxes budget that relies on a combination of spending cuts and optimistic financial projections to close a $19 billion deficit.

Details of the agreement between Gov. Arnold Schwarzenegger and legislative leaders began emerging Saturday ahead of a vote by rank-and-file lawmakers planned for Thursday. If approved, it would end a budget stalemate that has already stretched for 94 days.

The state would cut about $7.5 billion in spending as part of the deal, down from the $12 billion Schwarzenegger proposed earlier this year.

To make up the shortfall, the agreement counts on an improving economy and the federal government to provide more money than previously projected.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, said last week that the leaders turned to some "creative" bookkeeping after Republicans refused to raise taxes and Democrats rejected deeper budget cuts.

The pact he and the others reached Friday night assumes about $5 billion will come from the federal government, up from the $3.4 billion the governor had projected, said multiple sources close to the negotiations. It uses the Legislative Analyst's Office optimistic forecast of an additional $1.4 billion flowing to the state from higher-than-projected revenues. And it counts on as much as $1.2 billion from selling 11 state properties, then leasing them back.

Legislative and administrative aides said they could not speak for attribution until details of the budget are formally released ahead of committee hearings scheduled for Wednesday, but they agreed on all the major points.

The leaders had been under increasing pressure to pass a budget this week. Controller John Chiang has said he might have to issue IOUs for just the third time since the Great Depression if the week passed with no budget. Treasurer Bill Lockyer warned an estimated $7 billion in planned public works projects could be in danger if a deal was not reached soon.

This is the longest the state has ever gone beyond the July 1 start of its fiscal year without a budget. Legislative leaders have been struggling for ways to bridge a $19 billion gap, which represents more than 22 percent of the state's $84.5 billion budget last year.

To help get there, Republicans agreed to a two-year delay of a corporate tax break that had been set to take effect Jan. 1, saving the state $1.4 billion this fiscal year. In return, they won permanent concessions to close what they described as loopholes in an earlier business incentive law.

The changes won by Republicans affect the way companies calculate taxes on things like cable television and computer software, which Democrats complained would benefit corporate giants like Comcast Corp. and Microsoft Corp.

But Democrats said they narrowed the tax breaks to cut the cost to the state from $500 million to about $140 million this year. Republicans said the cost will be much less, as low as $41 million.

Republican support is critical because Democrats are several votes short of the two-thirds majority they need to pass a budget and tax increases on their own. Senate Minority Leader Dennis Hollingsworth, R-Murrieta, said Friday that he expects enough support among Republicans to pass the budget.

Republicans also avoided proposed taxes on oil production and on property owners' insurance to pay for firefighting services, and rejected Steinberg's proposal to rebalance the way the state levies income, sales and vehicle taxes. They also blocked a proposal to divert more state prison inmates to local county jails to save the state money.

Democrats said they were able to minimize cuts to schools, child care, welfare and other social programs, without giving details even to rank-and-file lawmakers who were briefed during conference calls Friday and Saturday.

Assembly Speaker John Perez, D-Los Angeles, said the proposal protects California jobs, avoids new taxes and shields schools from massive cuts.

"This budget honors all three of those core commitments," Perez said in a statement Saturday. He called the outcome "a solid — but sober — deal for California."

However, there is no guarantee all Democrats will support the agreement, setting up the usual last-minute horse-trading for votes.

Sen. Leland Yee, D-San Francisco, wouldn't support Democratic leaders' budget proposal during an Aug. 30 test vote, and is unlikely to vote for an even harsher compromise, said spokesman Adam Keigwin.

"He's not going to support a budget that severely cuts education, social services and health care. His position is we've cut enough in those areas, people are struggling in those areas," Keigwin said.

Both sides claimed victory on one of the biggest sticking points: pension reform.

Democrats expect the Republican governor to complete negotiations within days to win pension concessions from Service Employees International Union Local 1000.

The 95,000-member local represents nine of the 15 state bargaining units that lack a contract. If it agrees to benefit rollbacks, Democrats expect the remaining bargaining units to go along.

Once they do, Democrats could meet Schwarzenegger's demand that they repeal an 11-year-old law that authorized increases in public employee benefits.

"We came to an agreement on pension reform with the Legislature," Schwarzenegger press secretary Aaron McLear said Saturday, without giving details. "He's said since January that he won't sign a budget that doesn't include comprehensive pension reform. That remains the case."

Schwarzenegger had also demanded the state create a "rainy day fund." The leaders agreed to ask voters to reconsider creating such a fund on the 2012 ballot. Last year, voters rejected a proposal to build a reserve equal to 12.5 percent of revenue. The new version would ultimately create a 10 percent reserve.

Friday's announcement came just over a week after lawmakers and the governor said they had reached a "framework" for an agreement.

Copyright © 2010 The Associated Press. All rights reserved.

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