Obama Elected President, Pledges to Address Financial Crisis, but "Climb Will Be Steep;" Tax Policies Are Likely Immediate Priorities

With the state of the U.S. economy the top priority on voters' minds, Democratic presidential candidate Barack Obama was elected the 44th President of the United States. The freshman Democratic senator from Illinois secured at least 349 Electoral College votes, 70 votes more than the 270 required to win the presidency. While celebrating his hard-won victory at a rally in Chicago, Illinois, on November 5, Obama acknowledged the daunting economic and national security problems he will face beginning on Inauguration Day, January 20, 2009. "We know the challenges that tomorrow will bring are the greatest of our lifetime --two wars, a planet in peril, the worst financial crisis in a century," Obama stated.

In an interview with Wolf Blitzer on CNN's "The Situation Room," on October 31, Obama said that his top priorities upon taking office will be to further address the financial crisis, with tax cuts a likely part of the plan, and take measures to increase U.S. energy independence and reform the current tax system. The president-elect also indicated that the first bill he sends to Congress may be a stimulus package.

In his November 5 speech, Obama advised tens of thousands of supporters that "the road ahead will be long. Our climb will be steep," although he spoke words of encouragement about the future. "If this financial crisis taught us anything, it's that we cannot have a thriving Wall Street while Main Street suffers; in this country, we rise or fall as one nation; as one people."

Obama added, "We may not get there in one year or even one term, but America, I have never been more hopeful than I am tonight that we will get there. I promise you we, as a people, will get there."

White House Reaction

President Bush, in a Rose Garden statement, said "All Americans can be proud of the history that was made yesterday," in electing Obama as the next president. Noting the record number of voters who cast their ballots, Bush said the election results show "a watching world the vitality of America's democracy and the strides we have made toward a more perfect union."

Bush also stressed the historic significance of electing the first black president of the United States. "Many of our citizens thought they would never live to see that day. This moment is especially uplifting for a generation of Americans who witnessed the struggle for civil rights with their own eyes, and four decades later see dream fulfilled."

Bush asserted there is "important work to do" during his remaining few months in office. He plans to meet with his Cabinet on November 6 and afterwards make remarks focusing on "Tuesday's historic election, his expectations for continuing to address priorities throughout the remainder of his term and the importance of a smooth and orderly transition," according to White House Press Secretary Dana Perino.

Tax Policy Details

Now that the race for the White House has ended, taxpayers and practitioners can expect to see more details of Obama's tax policies emerge. On the campaign trail, the president-elect repeatedly stressed he was in favor of tax policies that support economic growth but rarely delved into specifics. His campaign messages about taxes do give some insights into where federal tax policy may be headed after his inauguration, especially in hot-button areas such as retirement savings, individual income tax rates, alternative minimum tax (AMT) relief and the tax treatment of capital gains and dividends, all set against the backdrop of a slowing economy and an all-time high federal budget deficit.

The new administration may set tax policy in three ways: first, by influencing what short-term stimulus tax package may be passed in a lame-duck session later in November; second, by proposing to Congress early in 2009 permanent tax reform measures; and third, by filling Treasury appointments with persons who will set a guidance agenda that will further advance the administration's tax agenda. Obama may announce his selection for Treasury Secretary before Thanksgiving.

CCH Comment. The history of tax bills going back at least 30 years supports the forecast that there will be a major tax bill in 2009. The Economic Recovery Act of 1981 (P.L. 97-34), the Tax Reform Act of 1986 (P.L. 99-514), the Taxpayer Relief Act of 1997 (P.L. 105-34), and the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 106-17) were all passed in the year immediately following a presidential election. Also, based on historical data, a first-term tax law won't pass until May (and probably not until July); but, historically, tax provisions in such bills are retroactive to January 1.

Retirement Savings. Perhaps the most immediate change may impact retirees. On the campaign trail, Obama suggested that the Treasury Department and the IRS suspend the penalty for taxpayers who do not take the required minimum distributions (RMDs) from IRAs, 401(k)s and other arrangements. A growing number of lawmakers from both parties have also urged a temporary suspension of the RMD rules for 2008. Congress could take action if there is a lame-duck session in mid-November.

Although the Treasury Department and the IRS appear to be able to suspend the RMD rules, suspension would have consequences for plans, Nicholas Curraba, counsel, Baker Daniels, LLP, Washington, D.C., told CCH. "The clearest solution would be for Congress to amend Code Sec. 401(a)(9) to provide IRS with the authority to waive RMDs as a qualification condition when it is appropriate to do so."

Obama also indicated during the campaign that he supported relaxing the rules for early distributions from IRAs, 401(k)s and similar arrangements. During the campaign, the president-elect said that he would allow withdrawals of 15 percent up to $10,000 from retirement accounts without penalty for 2008 and 2009. Regular tax rates would apply to the distributions.

Individual Tax Rates. During the campaign, Obama frequently said, "no family making less than $250,000 will see their taxes increase." It appears that he intends to renew the lower individual marginal income tax rates enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (P.L. 106-17) but reinstate the 36 and 39.6 percent rates. He has also endorsed eliminating income taxes for senior citizens making less than $50,000 a year.

During the campaign, Obama also said the he would restore "the 1990s levels for the personal exemption and itemized deduction phaseouts." The pre-2001 PEP and Pease limitations would apparently be allowed to revive after EGTRRA sunsets in 2011.

Obama has indicated his support for another round of tax rebates, similar to the ones authorized by the Economic Stimulus Act of 2008 (P.L. 110-185). This could be accomplished by accelerating his proposed "Make Work Pay" tax incentive for lower- and middle-income individuals.

AMT. One of the biggest challenges facing Obama and the new Congress will be what to do about the AMT. The AMT is a huge revenue raiser for the federal government, Roberton Williams, principal research associate for the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, Washington, D.C., told CCH. However, the AMT increasingly encroaches on middle-income taxpayers, something it was never intended to do, Williams explained.

To prevent the spread of the AMT, Congress has regularly passed an AMT "patch." "The 2008 patch removed 22.7 million taxpayers from AMT liability," Williams said. While lawmakers have discussed AMT repeal for some time, they are more likely to make the AMT "patch" permanent in 2009 or beyond, Williams predicted.

Dividends/Capital Gains. For 2008 through 2010, qualified dividend income and capital gains tax rates are zero percent for individuals in the 10- and 15-percent tax brackets, and 15 percent for individuals in the higher tax brackets. "Families with incomes below $250,000 will continue to pay the capital gains rates that they pay today," Obama said during the campaign.

On the campaign trail, Obama proposed creating a new top capital gains rate of 20 percent for taxpayers "in the top two income tax brackets, adjusted to affect only families over $250,000." The president-elect also said he would "eliminate all capital gains taxes on investments in small and start-up firms."

Concerning dividends, Obama said during the campaign that "dividends will not return to being taxed at ordinary income tax rates." The top dividends tax rate "for people making over $250,000 would be set at 20 percent."

Businesses. During the campaign, Obama appeared to support lowering the federal corporate tax rate if unspecified "loopholes" are closed. The president-elect also discussed creating tax incentives to encourage American businesses to keep their operations in the U.S. He also indicated his support for making the research tax credit permanent and giving employers tax credits for new hires. When gasoline prices reached all-time highs this past summer, Obama spoke about enacting a windfall profits tax on oil companies.

Businesses seem to have a wait and see attitude to tax policy under an Obama presidency. A pre-election survey by Grant Thornton, LLP, found that nearly 80 percent of corporate financial officers do not plan to make any tax decisions based on the outcome of the presidential election. "It's a little surprising that so few financial executives plan to make any tax decisions based on who wins the election considering how much interest there has been," Mel Schwarz, partner, Grant Thornton, LLP, Washington, D.C. observed.

Financial Markets Rescue. The Treasury Department has begun infusing national and regional banks with up to $250 billion in new capital under the Emergency Economic Stabilization Act of 2008 (EESA) (P.L. 110-343) (TAXDAY, 2008/10/15, T.1). The Treasury Department is also expected to soon announce the first auction purchases of troubled securities (mortgage-backed securities) held by financial institutions. The EESA authorizes the Treasury Department to spend up to $700 billion to stabilize the financial markets. On the campaign trial, Obama suggested that the Treasury Department not limit itself to purchasing mortgage-backed securities but to also purchase other troubled assets, such as student loans and vehicle loans.

Energy. In recent years, Congress has used the tax code to encourage individuals and businesses to conserve energy and invest in alternative energy, most recently by extending a host of energy tax incentives in the EESA. This trend is likely to continue in as Obama has indicated his support for tax credits for "green" vehicles and other uses of alternative fuels along with extending some of the many targeted energy tax incentives. Obama also proposed energy rebates, possibly funded by a windfall profits tax on oil companies, to help individuals pay for home heating costs.

These federal incentives by themselves are unlikely to encourage conservation and use of alternative energy sources for many taxpayers, Fred Copeman, CPA, principal, Ernst & Young, LLP, New York, told CCH. "However, when combined with state incentives they become very powerful," Copeman said.

More Proposals. Many of the tax proposals discussed by the president-elect during the campaign were basically "sound bites" with very little, and often no, elaboration. Some of the tax proposals include:

--Enhanced saver's credit/New health care tax credits;

--A new refundable 10-percent mortgage interest tax credit;

--An expanded earned income tax credit;

--An enhanced and refundable child and dependent care tax credit; and

--Codification of the economic substance doctrine.

Revenue Challenges. All of these proposals will cost revenue at a time when the federal budget deficit is at an all-time high ($454 billion for 2008) (TAXDAY, 2008/10/15, T.3). During the campaign, Obama indicated that he would pay for new tax breaks by "responsibly ending the war in Iraq, limiting payments to high-income farmers, cutting subsidies for private plans in Medicare, reforming student loans, cutting earmarks, cracking down on international tax havens, ending no-bid contracting and phasing out unnecessary and duplicative programs."

Congress

House and Senate lawmakers are expected to return to Washington during the week of November 17 for organizational meetings. Members of the House Ways and Means Committee are expected to meet and will likely discuss agenda items for the beginning of the 111th Congress, a committee aide said.

The Senate Finance Committee will see some changes in 2009 following the election, as one Republican member lost his re-election bid and another remains in a tight race that had not been called as of press time. Sen. John E. Sununu, R-N.H., will not return and possibly Sen. Gordon Smith, R-Oregon, who held a slim one-percentage point lead with 75 percent of precincts reporting. Committee member Pat Roberts, R-Kan., easily won his re-election bid. Three Committee Democrats, Chairman Max Baucus, D-Mont., John F. Kerry, D-Mass., and John D. Rockefeller, D-W.Va., were up for re-election and all held onto their seats.

The U.S. economy will be first on the agenda when Congress reconvenes with President-Elect Obama in January, House Speaker Nancy Pelosi, D-Calif., said on November 5. Congress may return for a lame-duck session in November but only if President Bush and the Senate Republicans will allow votes on an economic stimulus package, Pelosi noted. The package would include provisions to boost spending on infrastructure projects, extend unemployment insurance, allow emergency food assistance to low income Americans, and help states to pay for healthcare of children and seniors.

"I think it's important for the American people to know that many of our options have been diminished because of the downturn in the economy in the last couple of months," Pelosi stated. "The revenue foregone because of the financial crisis has changed the budget projections."

Depending on what President Bush is willing to sign in 2008, the House might have to pass a separate economic stimulus package under the new administration, Pelosi told reporters. The House will be working with the new president on his legislative agenda, but the House's priorities have tracked the Obama candidacy, she said.

By Jeff Carlson, Stephen K. Cooper, Paula Cruickshank, George G. Jones and George L. Yaksick, Jr., CCH News Staff.