Tax Title ofTreasury Releases FY 2007 Blue Book

Washington, 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:

• Increased expensing for small businesses;

• A set of proposals to improve access to health care and expand Health Savings Accounts (HSAs);

• Proposals to increase compliance, simplify the tax laws and reduce taxpayer burden; and

• A proposal to create a new Dynamic Analysis Division within the Treasury Department's Office of Tax Policy.

 

Increase Small Business Expensing

 

Small 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).

 

This 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.

 

More 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.

 

Improve Access to Health Care and Expand Health Savings Accounts (HSAs)

The 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.

 

These 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.

 

The 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 health plans.

 

• An 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.

• HSA 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.

• A 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 families.

• Other proposals included in the FY 2007 Budget would generally make HSAs more flexible and accessible.

 

Health 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.

 

The 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.

 

• Current 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.

• The tax subsidy is generally not available to the uninsured or to individual insurance purchasers.

• Employees 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.

 

Simplify the Tax Laws, Reduce Taxpayer Burden and Increase Voluntary Compliance

 

Simplify the Tax Laws for Families:

 

The President's budget includes proposals to make the tax code simpler for families with children.

 

Clarify 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.

 

Simplify 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.

 

Reduce 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.

 

AMT Relief

 

The 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 reform.

 

The 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.

 

Without 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 in 2006).

 

Improving Voluntary Compliance with the Tax Laws

 

While 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:

 

• Clarify the circumstances in which employee leasing companies and their clients can be held jointly liable for Federal employment taxes.

• Require debit and credit card issuers to report to the IRS gross reimbursements paid to certain businesses.

• Require increased information reporting for certain non-wage payments made by Federal, State and local governments to procure property and services.

• Amend collections due process procedures applicable to Federal employment taxes.

• Expand return preparer identification and penalty provisions.

 

In 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.

 

Create New Dynamic Analysis Division within Treasury's Office of Tax Policy

 

In 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).

 

Improve Productivity to Constrain Costs at Internal Revenue Service

 

The 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.

 

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REPORTS

• FY 2007 Blue Book