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Obama Would End Death Tax Break for Wealthy to Fund Middle Class Tax Breaks, Programs

Obama has a new plan to eliminate a death tax break that benefits wealthy heirs to fund middle class tax breaks and other programs. (Tom Williams/CQ Roll Call File Photo)

President Barack Obama's sweeping new tax proposal, detailed by senior administration officials Saturday, takes aim at the less-well-known death tax break.  

The new wrinkle is part of a broader economic plan to be outlined by Obama in his State of the Union address Tuesday. He will propose eliminating a big tax break for wealthy heirs to fund new and expanded middle class tax cuts and other proposals such as his free community college initiative. The biggest banks would also face higher taxes.  

The proposal is aimed squarely at income inequality but is likely to have a rough road among Republicans fresh off a triumphant midterm election.  

"A key part of what he will be presenting on Tuesday night ... is how do we make the system more fair by closing loopholes but then take the revenues from that and use that as ways to invest in the middle class," a senior administration official said Saturday.  

The tax provisions to be presented to Congress by Obama in his State of the Union address Tuesday would raise roughly $320 billion over the next decade.  

Of course, Republicans are sure to criticize using tax increases of any sort to pay for new spending. But it remains to be seen whether some of the proposals could be part of negotiations over a larger tax overhaul Republicans insist must be revenue neutral.  

About $210 billion in higher taxes would come from capital gains tax changes and $110 billion from a new 7 basis point fee on borrowing by financial institutions with greater than $50 billion worth of assets.  

The money would be used to pay for, among other things, the proposal Obama unveiled in Tennessee to provide two years of community college free of charge to qualified students. That plan would cost the government about $60 billion over a decade.  

Under the administration's plan, the top capital gains tax rate would go back up to 28 percent, which is where it was when Ronald Reagan was in the White House, senior administration officials were quick to point out.  

Perhaps the more intriguing change, though, is the proposed end of allowing the cost basis for assets to be "stepped-up" when they're inherited, meaning potential capital gains tax dollars are never collected. Many mega-billionaires, such as Warren Buffett, for example, haven't paid taxes on the bulk of their wealth because it is tied up in never-realized capital gains that will disappear — from a tax perspective — when they die.  

"By letting very wealthy investors make their capital gains disappear at death, stepped-up basis creates strong 'lock-in' incentives to hold assets for generations, even when resources could be reinvested more productively elsewhere," the White House said. "The proposal would sharply reduce these incentives, making it a pro-growth way to raise revenue."  

A senior administration official said the proposals come with exemptions designed to keep it from hitting the middle class with a new higher tax burden, including allowing a $500,000 exemption per couple for the transfer of a personal residence.  

The administration says 99 percent of the revenue raised by raising the capital gains tax rate and ending the capital gains tax exclusion at death — what it dubs the "trust fund loophole" — would come from the top 1 percent wealthiest taxpayers. And 80 percent would come from the richest 0.1 percent. The administration says hundreds of billions of dollars in capital gains are sheltered from taxes each year via death.  

Obama will also be asking Congress for new or expanded tax credits, including an increase in the Earned Income Tax Credits for people without children and a new $500 credit for families with two income-earners, which the administration estimates would be a benefit to 24 million couples.  

And it would triple the child care tax credit to up to $3,000 per child under 5, which the White House said would benefit about 5.1 million families and 6.7 million children.  

There's also going to be a proposal to provide for automatic enrollment in individual retirement accounts and to require employers let many longer-tenured part-time workers buy into company-sponsored retirement plans. In a fact sheet, the White House said it would propose offsetting the retirement changes and accompanying tax credits for employers by curbing tax-preferred retirement plans that accumulate a sum that works out to roughly $3.4 million.  

"Tax-preferred retirement plans are intended to help working families save for retirement. But loopholes in the tax system have let some wealthy individuals convert tax-preferred retirement accounts into tax shelters, including 300 extraordinarily wealthy individuals who have accumulated more than $25 million each in IRAs," the White House said.  

A number of the proposals Obama's expected to outline Tuesday are said to be modeled on efforts with Republican supporters. The administration has cited, among others, House Republican Conference Chairwoman Cathy McMorris Rodgers of Washington and Ways and Means Chairman Paul D. Ryan of Wisconsin — and yes, even the Heritage Foundation.  

While much should be clear by the end of the State of the Union, granular details of the president's plans are likely to appear where they always do: when the Office of Management and Budget releases the budget request for the next fiscal year on Feb. 2.  

As for the State of the Union, it's clear the new proposals and the willingness to talk about new revenues are tied to what Obama sees as progress on the economy.  

"He is very optimistic about America's future, he's very optimistic about potential for how well our economy has done and potential for the economy to grow, and that will be reflected in the speech, and then he will have the specifics that he thinks  — the choices that we need to make to make sure that extends to the middle class," the official said. Obama and others in his administration have been unusually eager to talk about the domestic policy proposals that he will highlight during Tuesday evening's State of the Union address, as part of an effort that was made public shortly before the president left Hawaii .  

A senior administration official called the advance rollout that's featured some presidential barnstorming "probably a clearer way for the president to present his vision" but cautioned against the idea that the potential for fewer surprises might mean a significantly shorter presentation to assembled members of the House and Senate.  

"It'll be a healthy speech still in terms of breadth and length," the official said.  

And Obama still plans the more traditional post-State of the Union travel, too. Press Secretary Josh Earnest said late Friday that the president would be traveling to Boise State University and the University of Kansas in the days after the Tuesday evening speech at the Capitol.  

Steven T. Dennis contributed to this report.    

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