NATION

Obama to propose overhaul of capital gains and dividends taxes

Obama plans to unveil package of tax proposals targeting capital gains and large financial firms

President Obama, keeping up a push for what he calls tax fairness, plans to unveil a new package of tax proposals that target inherited assets, capital gains and large financial firms to pay for billions in new tax benefits for low- and middle-class taxpayers.

The president will detail the new package, which would raise $320 billion in revenue over the next decade, in his State of the Union address Tuesday night, senior administration officials said Saturday.

The officials described the plan as a key element in a speech that will declare a turnaround in the U.S. economy and lay out Obama’s plans to keep middle-income Americans from being left out of the upswing. While the policy may underscore Obama’s message, it is unlikely to find much traction in Congress, where Republicans have dismissed similar plans as tax hikes that hurt business and slow job growth.

Obama’s tax plans use a familiar tactic for this White House — focusing on “loopholes” primarily used by the wealthy to pay for provisions aimed at working families.

Officials said the president will propose an overhaul of capital gains and dividends taxes. His plan would eliminate a rule known as the “stepped-up basis” that can leave much of the value of inherited assets and trust funds exempt from income and capital gains taxes. He also will propose increasing the capital gains and dividends tax rate from 23.8% to 28% for couples earning more than $500,000 a year.

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FOR THE RECORD

Jan. 17, 7:02 p.m.: An earlier version of this post said the capital gains and dividends tax rate is 20%. It is 23.8%.

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Obama’s package also includes a new tax on financial firms with more than $50 billion in assets. The fee, which would affect roughly 100 firms, would be applied on the firms’ liabilities and is meant to discourage especially risky borrowing, said the officials, who spoke on condition of anonymity to discuss Obama’s plans before the formal announcement.

The White House plans may serve as the starting gun for the debate over whether Obama and a Congress newly controlled by Republicans are capable of brokering a deal on reforming the tax code. Although leaders in both parties have said they see tax reform as potentially fertile ground for compromise, large ideological gaps between the parties, little trust and major pressure from outside make prospects dim.

“This is not a serious proposal,” said Brendan Buck, a spokesman for Republican Rep. Paul D. Ryan of Wisconsin, chairman of the powerful House Ways and Means Committee.  “We lift families up and grow the economy with a simpler, flatter tax code, not big tax increases to pay for more Washington spending.”

A senior administration official did not suggest that the president’s proposals comprise a complete road map for a reform deal, but rather a way to underscore his priorities.

“He is proposing these in the context of showing how he could do this not only without adding to the deficit but actually simplifying the tax code and making it work better for working-class Americans,” the official said.

Any deal would take a sort of grand compromise that has largely eluded Obama and GOP leaders on the Hill. Only under the threat of default did Republicans and Democrats last make significant changes to tax code. That deal, the so-called fiscal cliff deal of 2013, raised capital gains tax rate for top earners from 15% to 20%. It may be difficult to persuade Republicans to go higher.

A spokesman for Senate Majority Leader Mitch McConnell (R-Ky.), said the proposal would reverse the 2013 deal.

"It's not surprising to see the president call for tax hikes, but now he's asking Congress to reverse bipartisan tax relief that he signed into law," said Don Stewart, deputy chief of staff. "Republicans believe we should simplify America’s outdated tax code; that tax filing should be easier for you, not just those with fancy accountants; and that tax reform should create jobs for families, not the IRS."

On Saturday, the White House argued that some of its ideas had won at least some Republican backing before. But those, like a list of tax credits for low- and middle-income earners, did not include the higher tax rates.

Obama wants to streamline the maze of higher education credits, and replace it with a simpler system that would raise the American Opportunity Tax Credit so that up to $2,500 could be used by full and part-time students for five years, the official said.

The president will propose that tax deductions for child care expenses be tripled to up to $3,000 per child under 5 years old. He’ll propose opening more retirement savings plans to part-time workers and requiring employers to automatically enroll employees in an IRA account, if they don’t already offer a savings plan.

The plan also includes a “second-earner” tax credit that would benefit two-income married couples, an idea already included in House Democrats’ tax plan.

Obama will also continue to push for expanding the Earned Income Tax Credit to workers without children, a move he has argued would reduce poverty.

A senior administration official said these provisions would cost roughly $175 billion over 10 years. The tax changes aimed at the wealthy would also cover the president’s new $60-billion proposal to make two years of community college free, a plan announced last week, the official said.

Twitter: @khennessey

Copyright © 2016, Los Angeles Times

UPDATE

7:02 p.m.: This story has been updated with a comment from the offices of Rep. Paul D. Ryan (R-Wisc.) and Sen. Mitch McConnell (R-Ky.).

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