A bruising budget battle, near-government shutdown, lightening-rod speech by President Obama, and threatened downgrade in the AAA rating of US debt all added to the momentum for major tax reform in the first few weeks of April 2011. At this point, the calls for tax reform are intertwined with efforts to reduce the federal deficit, and some of the proposals in process are more sweeping than we have seen in decades. With both White House officials and legislators proposing major changes to tax laws, even the most knowledgeable tax advisors cannot predict which proposals will be enacted into law. But you need to know what is being considered, so you can be prepared for the full range of possible outcomes. As a starting point, this alert outlines recent events calling for tax reform, along with current proposals and expected next steps.

What is driving tax reform?

The discussions about tax reform began with a series of high profile reports designed to address the growing federal deficit. (See Table 1 for links to these reports). Although President Obama has not fully endorsed the recommendations of any of these reports, he has repeatedly called for tax reform in his State of the Union address, budget request for 2012, and April 13^th speech on deficit reduction.

Why is tax reform in the spotlight now? First, both parties support measures to reduce the deficit and create an economy that will allow businesses to grow and add jobs. Second, both parties support simplifying the tax code. Tax reform is the rallying cry to achieve these objectives, but the parties and individual Senators and Congressmen have very different views about the exact changes that should be made to the tax code.

What has President Obama proposed?

In his speech on deficit reduction, President Obama outlined a four-step approach that would save approximately $4 trillion from the federal deficit over the next twelve years according to White House estimates. These cuts would build on the $1 trillion of deficit reductions expected to result from the President’s 2012 budget request.

The 2012 budget request would realign the tax burden by eliminating some tax breaks while providing for extension of the Bush Tax Cut rates for lower-income individuals, as well as certain tax breaks for businesses, including the research and experimentation tax credit and increased limits on expensing of small business assets under Code section 179. Highlights of these and other tax changes included in the 2012 budget request are summarized on Table 2.

Going beyond the 2012 budget, the President outlined a longer-term framework in which tax reform would be one of four key steps taken to achieve an incremental $3 trillion reduction in the deficit. The main focus of this reform would be on “tax expenditures,” with a goal of reducing these expenditures enough to lower both tax rates and the deficit. The term tax expenditures refers to tax credits or deductions, such as itemized deductions for interest on personal mortgages and charitable donations. The other three steps involve cuts in domestic spending, security spending, and health care costs, including costs associated with the Medicare and Medicaid programs.

What will happen next?

Over the coming weeks and months, we expect additional discussion and debate of the President’s 2012 budget request and framework for deficit reduction, along with a number of other key proposals including the following:

• An alternative fiscal year 2012 budget resolution and vision for a long-term blueprint that was developed by House Republicans and is known as the Path to Prosperity.
• A comprehensive tax reform proposal that Treasury Secretary Tim Geithner has said the Administration is now developing,
• A proposal by a bipartisan group of Senators known as the “Gang of Six”.
• A proposal to be developed by a bipartisan negotiating group formed at the President’s request and led by Vice President Joe Biden.

The negotiations and debate are expected to be difficult, and the timing of any resulting tax reform is the subject of considerable uncertainty. Frameworks or blueprints are helpful in times of uncertainty because they lend flexibility to the legislative process. For example, the frameworks can be used to establish overall approaches and targets, while leaving the details to be filled in later. For planning purposes, the pivotal questions are: “When is a framework likely to be agreed upon?” and “How much later will the details be known?” It seems possible that a framework could be agreed upon within the next few months, as pressures mount to adopt a fiscally responsible budget for 2012 and raise the debt ceiling before government borrowing approaches the federal debt limitation. However, the details may not be available until after the 2012 Presidential election or even later. As the debate intensifies and the timetable becomes clearer in the spring and summer months, the details will be summarized in future CBIZ MHM publications.

In the meantime, if you have any questions about this alert or how the tax reform proposals might affect you, please contact your local CBIZ MHM tax advisor.

Copyright © 2011, CBIZ, Inc.All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. To ensure compliance with requirements imposed by the IRS, we inform you that—unless specifically indicated otherwise—any tax advice in this communication is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

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