Obama tax proposals may be DOA

President Barack Obama's State of the Union speech Jan. 20 mentioned only broadly his vision for helping middle-class workers save more for retirement, but he's poised to submit proposals to Congress on Feb. 2 as part of his fiscal 2016 budget.

Prior to Mr. Obama's speech, the White House offered details on proposals for achieving his goals related to retirement savings and rebalancing a tax code the president said favors the wealthy.

However, the necessity of several of his ideas was questioned by industry sources, as well as by Orrin Hatch, R-Utah, incoming chairman of the Senate Finance Committee, who set out the committee's top priorities before the U.S. Chamber of Commerce on Jan. 19.

Mr. Hatch criticized Mr. Obama's tax reform proposal targeting high-income taxpayers, including increasing the capital gains tax rates to 28%. Mr. Obama also will propose in the budget a seven-basis-point fee on leverage held by financial institutions with assets of $50 billion or more. Mr. Obama's plan “appears to be more about redistribution, with added complexity and class warfare ... than about tax reform,” Mr. Hatch said.

“The United States already has among the highest integrated capital gains and dividends rates in the developed world,” said Kenneth Bentsen Jr., Washington-based president and CEO of the Securities Industry and Financial Markets Association, in a statement. “The president's proposal would push us further out of step with our economic competitors and would worsen the existing bias for debt over equity financing. The tax code is not the place for a broad, new and duplicative financial regulatory regime.”

Messrs. Obama and Hatch did agree on the need for a starter 401(k) plan to spur more workplace retirement savings. Mr. Obama would require employers with 10 or more employees that do not now offer retirement plans to enroll workers, including part-time employees, in automatic individual retirement accounts; workers would have the right to opt out of the plans. Smaller employers offering an auto IRA, or adding an auto feature, would get a tax credit.

The starter plan is part of Mr. Hatch's SAFE Retirement Act proposal the Senate committee is expected to take on. That proposal also would expand the use of multiple-employer plans and allow public defined benefit plans to purchase private annuities.

“I remain convinced that my plan represents the best solution to the growing pension crisis in America,” Mr. Hatch said.

Mr. Obama plans to reintroduce the idea of a cap on tax-favored accumulation of all private retirement assets, including defined benefit and defined contribution plans. Aimed at providing annual retirement income comparable to the current $205,000 annuity limit for defined benefit plans, after which the savings would not be tax deferred, the proposal, if enacted, would result in a $3.4 million cap on retirement accounts at current interest rates.

The cap proposal “is misleading,” said Alan Glickstein, senior retirement consultant at Towers Watson & Co. “There are already significant limits (on retirement plan contributions and benefits). It's just going to add more costs to a system that is already overburdened, and not doing anything real. This isn't the kind of policy we need.”

According to modeling done by the Employee Benefit Research Institute, more than one in 10 current 401(k) participants are likely to hit that cap before age 65, and even more will reach the cap when interest rates begin to rise.

American Benefits Council President James Klein said revisiting the idea sends a mixed message about retirement security. Benefits professionals “are astounded” that Washington policymakers “are putting forth proposals that will inhibit savings needed for future retirement security,” Mr. Klein said in a statement.

Earlier this month, the Finance Committee launched five bipartisan working groups to explore tax reform proposals for individuals and businesses, ways to promote savings and investment, infrastructure and community development, and international tax issues.

“They are all committed to this process, and I believe it is going to work,” Mr. Hatch said, adding that he expects legislation to be introduced and acted upon later this year.

Mr. Hatch also pledged that his committee would tackle “a coming entitlement crisis that threatens to swallow up our government and take our economy down with it,” taking a hard look at Social Security, Medicare and Medicaid. n