Senate Democrats Alter President’s Tax Plan

July 18, 2012

Senate Democrats have unveiled a plan that would allow for a one-year extension of the Bush tax cuts for those earning $250,000 or less and raise the tax rate to 20 percent on dividend income for 2013—a different approach than what President Barack Obama has proposed.

In a July 9 speech, President Obama called on Congress to immediately extend the 2001 and 2003 marginal income rates–the Bush tax cuts–for one year for taxpayers with adjusted gross income of less than $250,000 per year ($200,000 for individuals), while letting tax cuts for those earning more expire as scheduled Jan. 1, 2013.

Under current law, and without congressional action, the top marginal income tax rate for individuals is scheduled to increase to 39.6 percent (from 35 percent), the rate on long-term capital gains will increase to 20 percent (from 15 percent), and the top rate on qualified dividend income will jump to 39.6 percent (from 15 percent) on Jan. 1, 2013.

Expiration of the Bush tax cuts also would mean that the top estate tax rate will climb to 55 percent (from 35 percent), the estate tax exemption will fall to $1 million (from $5 million), and limitations on personal exemptions and itemized deductions will be reinstated.

The speech prompted congressional Republican leaders to reiterate their own position that the Bush tax cuts should be extended for taxpayers at all income levels, noting that the president’s proposal would be detrimental to small businesses. According to NSBA data, 83 percent of small businesses are pass-through entities, meaning the business income flows through to the owner(s) personal income and is taxed at that level.

On Monday, Senate Democratic leaders circulated a draft bill that would reduce the deficit by $272 billion by doing what Obama has called for—allowing the Bush tax cuts to expire on annual household incomes greater than $250,000. However, the Senate package would raise the rate on dividends and capital gains  from the current 15 percent to 20 percent – a much gentler boost than the 39.6 percent new rate the president has most recently proposed. In his 2013 budget, Obama calls for investment income to be taxed as ordinary income, which means the tax rate could rise as high as 39.6 percent.

The Senate will vote before the August recess on the Democrats’ tax bill, which also would preserve current tax rates on household income under $250,000 and individual income under $200,000. Meanwhile, the Republican-led House plans to hold its own vote later this month to extend all of the Bush tax cuts for another year.

It is unlikely the Senate will be able to garner the 60 votes needed to advance the proposal in the Senate, and the House plan will not advance any further than its own chamber. Instead, the votes will set up the lame duck session when Congress returns in the fall, forcing them to address the myriad of expiring tax cuts as well as the automatic across-the-board spending reduction known as sequester.

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