Winners and Losers in the Obama Budget

TPC has just completed a major analysis of the tax provisions of President Obama’s 2011 budget. The proposals look a lot like last year’s, and, not surprisingly, we again found that most taxpayers would get a tax cut under the Obama plan, relative to current law. Nearly 80 percent would pay less tax in 2012. That’s assuming that the Bush tax cuts expire as scheduled in 2010 and the Alternative Minimum Tax (AMT) is allowed to bite millions more taxpayers. (We look at 2012 to get beyond the worst effects of the great recession and any transition issues.)

But there are some interesting changes. The biggest is the proposal to continue Obama’s signature Making Work Pay (MWP) credit for just one year, rather than making it permanent as last year’s budget called for. MWP would thus disappear in 2012. That cutback may be the result of another change: Obama no longer assumes he’ll have the “climate revenues” that he proposed last year to pay for a permanent MWP.

The demise of the MWP would affect many taxpayers. Measured against current policy—permanent extension of the Bush tax cuts, an estate tax at 2009 levels, and a permanently higher AMT exemption—just one-third of tax units would get tax cuts in 2012, a far cry from the four-fifths we estimated for last year’s budget. By itself, MWP would cut tax bills for three-fourths of all tax units in 2011 before disappearing.

The budget reprises last year’s proposal to cap the value of itemized deductions at 28 percent, even though Congress has thus far ignored the idea. The cap faced intense opposition from charities that worried the reduced value of itemized deductions would discourage giving and from the real estate industry that feared the lower-value deductions for property taxes and mortgage interest would hurt their business.

There is one noticeable new proposal that would increase the child and dependent care credit for middle-income families. Obama would boost the credit rate for families with income as high as $113,000. Combine that with a higher limit on creditable expenses and a middle-income family’s tax bill drops by as much as $1,160 next year.

Overall, the bottom line doesn’t change a lot: taxes would go up sharply for taxpayers with the highest income and stay the same or fall for everyone else. Against current law in 2012, 95 percent of those in the top three quintiles—the 60 percent with the highest income—would pay an average of about $3,000 less income tax. In contrast, about half of the richest 1 percent—those with 2012 income over about $600,000—would pay a lot more.

The tax proposals in Obama’s budget went nowhere in 2009—for many reasons. They haven’t changed much, and there’s little reason to expect them to meet a different fate this year.