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Thursday April 24, 2014

Washington News

Washington Hotline

White House Releases 2014 Budget

On April 10th, the White House published the federal budget for 2014. Previously, both the House Republicans and the Senate Democrats had passed their respective budgets.

While there are wide differences in the three budgets, the President, the House and the Senate now have all outlined their respective financial goals. President Obama proposed a budget that would reduce the deficit by $1.8 trillion over 10 years. Approximately two-thirds of that amount is through spending cuts and reduced interest and one-third is through tax increases.

The largest tax increase is a 28% limit on tax benefits from itemized deductions. This would cap tax savings for individuals in the 33%, 35% and 39.6% brackets. They would lose part of their tax benefits for itemized deductions such as state and local taxes, medical deductions and charitable deductions. The White House "28% cap" proposal is estimated to produce tax revenue of $529 billion over the next decade.

With respect to estate taxes, the White House proposes lowering the exemption from the current $5.25 million back to the $3.5 million level of 2009. The current 40% estate tax rate would be increased to 45%.

A third increase would be the "Buffett" tax. The tax named after businessman Warren Buffett is a 30% minimum tax on individuals with over $1 million in gross income. The tax would permit deduction of charitable gifts prior to determination of the tax amount.

A controversial part of the budget is the "chained CPI." This is a newer method for determining the inflation increase for both tax brackets and entitlement benefits. The chained CPI assumes that individuals facing increased prices will purchase less expensive alternatives. With this assumption, there will be slower growth of the indexed tax brackets. This change would raise $100 billion in tax revenue over the next decade.

The White House also proposes a cap on retirement plan benefits. While the concept is fairly technical, it would create a limit on IRAs and other qualified retirement plans of approximately $3 million. The White House proposes that individuals who reach their maximum level would no longer be permitted to make deductible contributions to the plan. This provision could be quite complex to administer because individuals would have to disclose the value of all retirement plans to employers. Employers then would have to monitor the value of the plans in order to be certain that the individuals qualify for 401k, 403b, and other types of qualified retirement plan contributions.

President Obama spoke on April 10th and stated, "If we can come together, have a serious, reasoned debate – not driven by politics – and come together around common sense and compromise, then I'm confident we will move this country forward and leave behind something better for our children."

Speaker of the House John Boehner (R-OH) responded that President Obama deserves "some credit for instrumental entitlement reforms." However, Boehner continued, "I hope that he would not hold hostage these modest reforms for his demand for bigger tax hikes. The President got his tax hike in January; we don't need to be doing that."

Editor's Note: For the first time in four years, there now are budgets from all three major Washington organizations – the White House, Senate and House. The nonpartisan Committee for a Responsible Federal Budget (CRFB) commented on the upcoming discussion. Maya MacGuineas, President of CRFB stated, "With the President's budget and both the Senate and House-passed budget resolutions all putting debt on a downward path as a share of the economy for the first time, I am hopeful that productive and bipartisan budget discussions can resume in earnest." While the parties will all vigorously support their positions, it appears that they are steadily moving toward a solution of the budget issues. Success in this area is very important for the long-term health of philanthropy.

Published April 12, 2013

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