President Obama called for tax reform measures this week to cut the budget deficit by $1.5 trillion over the next decade in his fiscal year 2013 budget.

The budget outline builds on many of the proposals in the American Jobs Act that Obama proposed last year, and which so far has failed to advance in Congress. It envisions the expiration of the 2001 and 2003 tax cuts for high-income taxpayers and enshrines the so-called “Buffett Rule,” which Obama also described in his State of the Union address. Under the Buffett Rule, no household making more than $1 million a year would pay less than 30 percent of their income in taxes.

The budget also seeks to simplify the Tax Code, lower tax rates, and protect progressivity. It would eliminate “inefficient and unfair tax breaks for millionaires while making all tax breaks at least as good for the middle class as for the wealthy." Among the proposals are taxing dividends at ordinary income tax rates instead of the lower capital gains rates.

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The budget proposal would impose a “Financial Crisis Responsibility Fee” on the largest financial institutions to compensate taxpayers for their “extraordinary support.” The fee would raise $61 billion over 10 years and is intended to offset the cost of the Troubled Asset Relief Program, or TARP, and the President’s recent proposal for a mortgage refinancing program.

For every $1 in new revenue from those making more than $250,000 per year and from closing corporate loopholes, the budget provides $2.50 in spending cuts, including deficit reductions enacted over the last year.

“In the budget, I reiterate my opposition to permanently extending the Bush tax cuts for families making more than $250,000 a year and my opposition to a more generous estate tax than we had in 2009 benefiting only the very largest estates,” said Obama in a message accompanying the budget. “These policies were unfair and unaffordable when they were passed, and they remain so today. I will push for their expiration in the coming year. I also propose to eliminate special tax breaks for oil and gas companies; preferred treatment for the purchase of corporate jets; tax rules that give a larger percentage deduction to the wealthiest two percent than to middle-class families for itemized deductions; and a loophole that allows some of the wealthiest money managers in the country to pay only 15 percent tax on the millions of dollars they earn. And I support tax reform that observes the ‘Buffett Rule’ that no household making more than $1 million annually should pay a smaller share of its income taxes than middle-class families pay.”

The budget calls for extension of the payroll tax cut and unemployment insurance benefits for the rest of 2012. Obama is also calling for an upfront investment of $50 billion from the surface transportation reauthorization bill for roads, rails and runways to create thousands of jobs.

Another proposal would reduce the value of itemized deductions and other tax preferences to 28 percent for married taxpayers filing a joint return with income over $250,000 (at 2009 levels) and single taxpayers with income over $200,000. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer sponsored health insurance; retirement contributions; and selected above-the-line deductions.

The budget also proposes taxing carried interest income as ordinary income. Many hedge fund managers, private equity partners, and other managers in partnerships are able to pay a 15 percent capital gains rate on their labor income (on income that is known as “carried interest”). Obama proposes to eliminate the loophole for managers in investment services partnerships and to tax carried interest at ordinary income rates.

Businesses would be allowed to continue to write off the full amount of new investments under the budget proposal. A new tax credit for this year would focus on small businesses and that gives businesses that add jobs and wages a tax cut equal to 10 percent of wages added up to $500,000.

The budget would also provide tax incentives for manufacturers who create jobs in the U.S. and doubles the deduction for advanced manufacturing. It also ends tax deductions for shipping jobs overseas, and establishes a Manufacturing Communities Tax Credit to encourage investment in communities affected by job losses.

Another proposal would eliminate special depreciation rules for corporate purchases of aircraft. Under current law, airplanes used in commercial and contract carrying of passengers and freight can be depreciated over seven years. Airplanes not used in commercial or contract carrying of passengers or freight, for example corporate jets, are depreciated over five years. The proposal would change depreciation schedules for corporate planes that carry passengers to seven years to be consistent with the treatment of commercial aircraft.

In addition, the budget would eliminate oil and gas tax preferences. Current law provides a number of credits and deductions that are targeted toward certain oil and gas activities. In accordance with an agreement at the G-20 Summit in Pittsburgh in December 2009 to phase out subsidies for fossil fuels to transition to a 21st Century energy economy, Obama is proposing to repeal a number of tax preferences available for fossil fuels.

"From a business perspective, the new budget reflects the Administration's priority to support domestic innovation and manufacturing, while at the same time reiterating the Administration's concern about the movement of business activity and income offshore," said Eric Solomon, who served as Assistant Secretary for Tax Policy at the US Treasury Department from December 2006 to January 2009, and is now a principal in Ernst & Young LLP’s National Tax Department. "The new budget also reflects the Administration's desire to address our country's fiscal imbalance, while at the same time including measures for near-term economic stimulus and job growth."

The budget also aims for more than $360 billion in savings to Medicare, Medicaid and other health programs over 10 years to make the programs more effective and efficient and move the health system toward one that rewards “high-quality medicine.”

The budget proposal would also provide $278 billion in non-health mandatory savings through reforms in areas such as agriculture subsidies and direct payments, federal civilian worker retirement, and the Pension Benefit Guaranty Corporation.

“The budget document released today by the Administration does not present a comprehensive view of tax reform, particularly on the business side," said Hank Gutman, principal-in-charge of federal tax legislative and regulatory services at KPMG LLP. "With respect to the latter, it fails to state a target corporate rate and consequently provides no guidance as to what revenue sources would be used to offset any rate reduction. The proposed ’minimum tax’ on offshore earnings is an expansion of the current system of worldwide taxation and an explicit rejection of a territorial system. The ad hoc incentives for manufacturing further complicate an already complicated business tax structure. These incentives are explicitly designed to favor one form of business income (manufacturing) over other sources of business income (e.g., services and retail). They appear to be inconsistent with the goals of simplifying the tax system and making it neutral with respect to economic decisionmaking.”

The budget also implements a new defense strategy to spend $487 billion less in the Department of Defense’s base budget than was planned in last year’s budget. The overall defense budget, including overseas contingency operations, is 5 percent below last year’s enacted level.

The budget also would provide $30 billion to modernize at least 35,000 schools and $30 billion to help states and localities retain and hire teachers and first responders. The budget also includes Project Rebuild, a series of policies to help connect Americans looking for work in distressed communities with the work needed to re-purpose residential and commercial properties in an effort to create jobs and stabilize neighborhoods.

In addition, the budget would provide $850 million for the Race to the Top education initiative, which implements systemic education reforms in five critical areas, including early learning and care. The budget also would provide $300 million in new resources to improve child care quality and prepare children for success in school.

A new $5 billion competitive program would be available to challenge states and districts to work with their teachers and unions to attract, prepare, and reward great teachers to help students learn.

The budget also aims to make college more affordable and help achieve the President’s goal of the U.S. leading the world in college graduates by 2020. It would sustain the maximum Pell Grant award through the 2014 to 2015 award year. The budget includes a one-year measure to prevent student loan interest rates from doubling this summer and doubles the number of work-study jobs.

New reforms would be available to help address rising costs by shifting some federal aid away from colleges that fail to keep their net tuition down and by providing incentives for states and colleges to keep costs under control.

The budget also proposes to make permanent the American Opportunity Tax Credit, a partially refundable tax credit worth up to $10,000 per student over four years of college. The AOTC helps more than 9 million students and their families afford the cost of college.

Republican leaders in Congress indicated they were unlikely to go along with Obama's budget proposal. Congress has failed to pass an annual budget in over two years.

“The President’s budget includes the biggest tax increase in history and the biggest budget deficit ever proposed," said House Ways and Means Committee chairman Dave Camp, R-Mich. "The President’s $2 trillion tax increase will destroy jobs and further weaken our economy.  Furthermore, the President is filling the Tax Code with even more special interest lobbyist loopholes, instead of joining Republicans in job-creating tax reform. "

Michael Cohn writes for Accounting Today.