Factbox: Likely tax elements in Obama budget plans

WASHINGTON Wed Feb 9, 2011 11:42am EST

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WASHINGTON (Reuters) - Corporate America is expecting a revival of proposals to tighten international tax rules in President Barack Obama's proposed 2012 budget, to be released on Monday.

In his first budget, Obama sought to raise more than $210 billion over a decade by trimming tax breaks enjoyed by companies with business overseas, in addition to chopping billions in tax preferences enjoyed by oil and gas companies.

After loud protests from companies and with few of his ideas moving in Congress, the White House trimmed its international corporate tax proposals by about $80 billion the following year. Those proposals could be brought up again in the latest budget.

On the individual tax side, Obama will call for an end to lower tax rates for wealthier Americans once a bipartisan deal struck in December to extend them expires at the end of 2012.

On Tuesday, the White House said it will propose financial relief for U.S. states struggling with high unemployment by boosting the amount of wages subject to unemployment insurance taxes.

The president's budget proposal is just a blueprint or wish list. Congress sets funding levels and enacts the budget, and a major battle looms on Capitol Hill now that Republicans control the U.S. House of Representatives.

BUSINESS TAX PROPOSALS

Since Democrats lost the House, Obama has been courting the private sector and has said he backs a cut in the 35 percent top corporate tax rate. Still, he has tied that idea to his earlier calls to close what he calls loopholes, many of which are prized by companies.

An overhaul of corporate taxes is seen unlikely in the run up to the 2012 elections, given the dicey task of curbing these tax breaks, but Obama could lay out some broad markers of what he wants corporate tax reform to look like.

Obama's prior proposals to close tax breaks include:

* Limits on deferral of taxes on interest expenses associated with income earned abroad, raising about $26 billion over a decade.

* Tightening rules on foreign tax credits, which are intended to avoid double taxation. Critics say the credits are abused, costing the government revenue. The plan would raise about $60 billion.

* Taxation of "excess returns" associated with shifting intangible property to low-tax locations, raising $15 billion.

Aside from the offshore income proposals, Obama's last budget proposed the following:

* Eliminate Last in-First Out (LIFO) accounting. Companies can now use this method of accounting, which can reduce taxes when prices are rising, to generate $60 billion over a decade.

* Cutting energy tax preferences for oil, gas and coal companies. These include deductions for intangible drilling and exploration and development costs. Obama's budget proposals seek repeal of many of these to raise $38 billion.

INDIVIDUAL RATES

Obama's budget will likely propose ending lower tax rates enacted under former President George W. Bush for wealthier Americans.

A bipartisan deficit panel, set up by the White House, last year recommended cutting individual tax rates and slashing so-called tax expenditures -- such as the mortgage interest deduction -- to help curb the ballooning budget deficit.

Obama called for simplifying individual taxes in his State of the Union address last month, but expectations are low that he will propose anything dramatic on that front.

ESTATE TAX

In a year-end deal brokered with Republicans, Obama agreed to a largely Republican-backed plan for a tax on inherited assets of 35 percent after a $5 million individual exemption.

In earlier budgets, Obama sought to cement the estate tax at 45 percent after a $3.5 million individual exemption.

DIVIDEND-CAPITAL GAINS

Obama proposed a 20 percent tax on dividends and capital gains for high earners in his past two budgets. Last year's tax deal kept the current 15 percent rate for two years, but Obama may re-propose the 20 percent rate for high earners.

The deficit commission proposed taxing this investment income at ordinary income rates.

BUSINESS TAX BREAKS

Obama will likely revive some business tax breaks:

* The research and development, or experimentation, tax credit enjoys support among both parties, although some have said it primarily benefits big firms that would do the research regardless.

Obama will likely renew his proposal to make the credit permanent, at a cost of $82 billion over 10 years and will likely do so again.

* Faster investment write-offs for businesses of all sizes were included in the December tax deal, and a form of this depreciation was a part of Obama's 2011 budget.

(Reporting by Kim Dixon; Editing by Eric Beech)

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