Tax Title ofTreasury Releases FY 2007 Blue Book
DC – The U.S. Treasury Department today released its General
Explanations of the Administration's Fiscal Year 2007 Revenue Proposals,
otherwise known as the Blue Book. In addition to permanent extension of
the President's tax relief enacted in 2001 and 2003, the President's FY
2007 Budget includes several new initiatives, including:
expensing for small businesses;
set of proposals to improve access to health care and expand Health
Savings Accounts (HSAs);
to increase compliance, simplify the tax laws and reduce taxpayer
proposal to create a new Dynamic Analysis Division within the
Treasury Department's Office of Tax Policy.
Small Business Expensing
businesses are an important source of innovation and risk taking in
today's economy. Small businesses also create three-quarters of the
nation's net new jobs. The President's FY 2007 Budget would permanently
allow small businesses to deduct up to $200,000 of investment in
equipment (section 179 property).
provision would encourage investment and capital formation by lowering
the cost of capital purchases. This additional expensing would build on
the lower marginal tax rates and the provision allowing up to $100,000
of section 179 expensing enacted as part of the President's tax relief
in 2001 and 2003 and proposed to be permanently extended by the
President's FY 2007 Budget.
investment by small businesses means more jobs created by this important
sector of the economy. Expensing is also simpler than claiming regular
depreciation deductions, which is particularly helpful for small
businesses. This expansion of section 179 expensing would extend the
benefits of expensing to more taxpayers and would also simplify tax
accounting for them. Making this expansion permanent would allow these
businesses to better plan their future investments.
Access to Health Care and Expand Health Savings Accounts (HSAs)
President's budget has important new proposals that will make health
insurance coverage more accessible and affordable to Americans. The
Treasury Department estimates that these proposals would increase the
projected number of Americans with HSA's by 50 percent. In 2010, the
Treasury Department projects an increase in the number of HSAs from 14
million to 21 million. The experience with HSAs so far is that 37
percent of new HSA enrollees were previously uninsured. If this trend
continues, the President's proposals to expand HSAs could result in a
substantial reduction in the number of uninsured.
proposals will lead to a more consumer driven, market-orientated health
care system that makes more efficient use of resources and reduces the
rise in health care costs.
President's FY 2007 Budget includes proposals that would help make
insurance more available and more affordable by putting employer
insurance, individually-purchased insurance, and out-of-pocket health
spending on an equal tax footing for those purchasing high deductible
above-the-line deduction and credit for payroll taxes paid (up to
15.3 percent) would be provided for high deductible insurance
premiums to place employer provided insurance on an equal footing
with individually-purchased insurance.
contributions would be allowed up to a plan's out-of-pocket limit
and a credit for payroll taxes paid (up to 15.3 percent) on HSA
contributions would be allowed to place out-of-pocket spending on
equal footing with health insurance.
refundable health insurance tax credit for premiums paid on high
deductible health plans would be provided for lower income
individuals to help them purchase catastrophic coverage. This credit
would cover up to 90 percent of the cost of a high deductible
insurance premium up to $1,000 for individuals and up to $3,000 for
proposals included in the FY 2007 Budget would generally make HSAs
more flexible and accessible.
care costs continue to rise rapidly in the United States. Empowering
health care consumers to play a more direct role in their health care
decisions, rather than third party payors, would help to stem this
trend. A health care system that is more market-oriented and consumer
driven will help control costs and result in health care that is more
affordable and accessible.
Federal tax code's treatment of medical care has been a fundamental
factor in the development of the third party system of financing health
care in the United States. However, the tax code does not treat the
self-employed, unemployed, and workers for companies that do not offer
health insurance (most of whom are small businesses) the same as
companies that do offer health insurance.
incentives in the tax code encourage people to insure against
predictable and routine expenses (not just unpredictable,
large-scale expenses) and, thus, are less sensitive to the cost of
the health care they consume.
tax subsidy is generally not available to the uninsured or to
individual insurance purchasers.
may be reluctant to leave their jobs for fear of losing their
insurance. Portability of health insurance is increasingly important
in today's dynamic labor markets where workers choose to change jobs
with increasing frequency.
the Tax Laws, Reduce Taxpayer Burden and Increase Voluntary Compliance
the Tax Laws for Families:
President's budget includes proposals to make the tax code simpler for
families with children.
the Uniform Definition of a Child. A taxpayer may be eligible to claim a
qualifying child for various tax benefits, including the dependent
exemption, head of household filing status, the child tax credit, the
child and dependent care tax credit, and the earned income tax credit (EITC).
The 2004 tax relief act created a uniform definition of qualifying
child, allowing, in many circumstances, a taxpayer to claim the same
child for five different child-related tax benefits. However, the 2004
tax relief act had some unintended consequences. To ensure that
deserving taxpayers receive child-related tax benefits, the President's
FY 2007 Budget proposes to clarify the uniform definition of a child.
EITC Eligibility Requirements. To qualify for the EITC, taxpayers must
satisfy requirements regarding filing status, the presence of children
in their households, and their work and immigration status in the United
States. These rules are confusing, require significant record keeping,
and are costly to administer. The President's FY 2007 Budget proposes to
make certain simplifying changes to these rules.
Computational Complexity of Refundable Child Tax Credit. Taxpayers with
earned income in excess of $11,300 may qualify for a refundable (or
"additional") child tax credit even if they do not have any
income tax liability. About 70% of additional child tax credit claimants
also claim the EITC. However, the two credits have a different
definition of earned income and different U.S. residency requirements.
In addition, some taxpayers have to perform multiple computations to
determine the amount of their additional child tax credit. The
President's FY 2007 Budget proposes certain changes to the additional
child tax credit rules to address these issues.
President's FY 2007 Budget proposes to temporary provisions in current
law for one year, through 2006, to address the rapid rise in the number
of taxpayers affected by the AMT in the near term. The Administration
believes that a longer term solution to the problems associated with the
individual AMT should be addressed within the context of fundamental tax
alternative minimum tax (AMT) imposes substantial burdens upon taxpayers
who were not the originally intended targets of the individual AMT. A
temporary provision, effective through 2005, increased the AMT exemption
amounts to $40,250 for a single taxpayer, and $58,000 for a married
couple filing a joint return. Beginning in 2006, the AMT exemption
amounts decline to $33,750 for a single taxpayer, and $45,000 for a
married couple filing a joint return. Another temporary provision
effective through 2005, permits nonrefundable personal tax credits to
offset both regular tax and the AMT.
any change in the tax law, the number of taxpayers subject to the AMT
would increase by 20.4 million (from 5.5 million in 2005 to 25.9 million
Voluntary Compliance with the Tax Laws
the vast majority of American taxpayers pay their taxes timely and
accurately, the nation still has a significant tax gap -- the difference
between what taxpayers should pay and what they actually pay on a timely
basis. The net so-called "tax gap" is roughly $300 billion
annually (15 percent of all taxes collected) and means that taxes are
higher for compliant taxpayers. In an effort to reduce the tax gap with
minimum taxpayer burden, the President's FY 2007 Budget proposes to:
the circumstances in which employee leasing companies and their
clients can be held jointly liable for Federal employment taxes.
debit and credit card issuers to report to the IRS gross
reimbursements paid to certain businesses.
increased information reporting for certain non-wage payments made
by Federal, State and local governments to procure property and
collections due process procedures applicable to Federal employment
return preparer identification and penalty provisions.
addition, the Treasury Department will study the standards used to
distinguish between employees and independent contractors for purposes
of withholding and paying Federal employment taxes.
New Dynamic Analysis Division within Treasury's Office of Tax Policy
addition to the tax proposals outlined above, the President's FY 2007
Budget would create a new Dynamic Analysis Division within the Treasury
Department's Office of Tax Policy. This Division would prepare dynamic
analyses of major tax policy changes. Dynamic analysis emphasizes the
potential economic benefits of tax changes for increasing and promoting
economic growth. It is particularly important for evaluating broad
changes to the tax system. Dynamic analysis recognizes a more
comprehensive range of behavioral responses to tax changes, including
how tax changes affect the size of the economy. The Treasury Department
will likely be in a position to conduct a dynamic analysis of the
President's tax proposals included in the FY 2007 Mid-Session Review
(released in mid-July).
Productivity to Constrain Costs at Internal Revenue Service
President's FY 2007 Budget proposes an IRS operating budget of more than
$10.7 billion, supporting the Administration's goal to restrain spending
and increase tax receipts. As part of this budget proposal, the IRS will
constrain costs by improving productivity, offsetting costs with user
fees and other adjustments to operations. The budget proposal would
enable the IRS to stay aligned with its strategic plan of balancing
service and enforcement and the goal of improving compliance. Toward
this end, the budget proposal holds steady resources for both taxpayer
service and enforcing tax laws.