Obama to call for raising capital gains, inheritance taxes to pay for middle-class tax relief

Lifestyle and Budget Associated Press

President Barack Obama will call for increasing taxes on the wealthiest Americans by raising the capital gains rate and eliminating a tax break on inheritances, then using the revenue to fund new tax credits and other cost-saving measures for the middle class.

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The president's proposals are likely to be cheered by the Democratic Party's liberal base, but the tax increases are all but certain to be non-starters with the new Republican majority on Capitol Hill.

Obama will announce the tax proposals Tuesday night in his State of the Union address. Senior administration officials disclosed details Saturday on the condition of anonymity because they were not authorized to discuss the proposals by name ahead of the president.

The president's address — his first to a Republican-led Congress — will also include calls for lawmakers to make community college free for many students, increase paid leave for workers and enact broad cybersecurity rules.

The centerpiece of the president's tax proposal is an increase in the capital gains rate on couples making more than $500,000 per year to 28 percent, the same level as under President Ronald Reagan. The top capital gains rate has already been raised from 15 percent to 23.8 percent during Obama's presidency.

Obama also wants to close what the administration is calling the "Trust Fund Loophole," a change that would require estates to pay capital gains taxes on securities at the time they're inherited. Officials said the overwhelming impact of the change would be on the top 1 percent of income earners.

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While GOP leaders have said they share Obama's desire to reform the nation's complicated tax code, the party has long been opposed to many of the proposals the president will outline Tuesday. For example, most Republicans want to lower or eliminate the capital gains tax and similarly want to end taxes on estates, not expand them.

"More Washington tax hikes and spending is the same, old top-down approach we've come to expect from President Obama that hasn't worked," a spokesman for House Speaker John Boehner, Michael Steel, said in a statement Saturday night. "Republicans are offering better solutions focused on helping small businesses grow and hire, and helping families improve their lives."

Administration officials pointed to a third proposal from the president as one they hope Republicans would support: a fee on the roughly 100 U.S. financial firms with assets of more than $50 billion. Officials said the fee is similar to a proposal from former Republican Rep. Dave Camp of Michigan, who led the tax-writing Ways and Means Committee. Camp's plan, however, was part of a larger proposal to lower the overall corporate income tax rate.

Raising the capital gains rate, ending the inheritance loophole and tacking a fee on financial firms would generate $320 billion in revenue over a decade, according to administration estimates. Obama wants to put the bulk of that money into a series of measures aimed at helping middle-class Americans. Among them:

— A credit of up to $500 for families in which both spouses work. The administration says 24 million couples would benefit from the proposal, which would apply to families with annual income up to $210,000.

— Expanding the child care tax credit to up to $3,000 per child under age 5. The administration says the proposal would help more than 5 million families with the cost of child care.

— Overhauling the education tax system by consolidating six provisions into two, a move that could cut taxes for 8.5 million families. Republicans have been open to the idea of consolidating education tax breaks.

Obama's call for higher taxes on the wealthy could further antagonize Republicans who are already angry with the president over his vows to veto several of the party's priorities, including legislation to approve construction of the Keystone XL oil pipeline, make changes to the president's signature health care legislation and block his executive actions on immigration.

"Slapping American small businesses, savers and investors with more tax hikes only negates the benefits of the tax policies that have been successful in helping to expand the economy, promote savings and create jobs," Sen. Orrin Hatch, R-Utah, the chairman of the Finance Committee, said in a statement. "The president needs to stop listening to his liberal allies who want to raise taxes at all costs and start working with Congress to fix our broken tax code."

Even before officials revealed Obama's tax proposals, Republicans were saying that his veto threats are a sign of a president who didn't get the message from voters who relegated his party to minority status in the November election. New Senate Majority Leader Mitch McConnell, R-Ky., said the president still has a chance to change his tone.

"Tuesday can be a new day," McConnell said Friday. "This can be the moment the president pivots to a positive posture. This can be a day when he promotes serious realistic reforms that focus on economic growth and don't just spend more money we don't have. We're eager for him to do so."

Beyond rolling out new proposals, Obama's address is also expected to focus on making the case to the public that recent economic gains represent a real and lasting recovery. The approach reflects the White House's belief that it has been too cautious in promoting economic gains out of fear of looking tone deaf to the continued struggles of many Americans.

White House advisers have suggested that their restraint hindered Democrats in the November elections and helped Republicans take full control of Congress for the first time in eight years. But with hiring up and unemployment down, the president has been more assertive about the improving state of the economy in the new year. Tuesday's prime-time address will be his most high-profile platform for making that case.

"America's resurgence is real, and we're better positioned than any country on Earth to succeed in the 21st century," Obama said Wednesday in Iowa, one of several trips he has made this month to preview the speech.

Obama isn't expected to make any major foreign policy announcements. He is likely to urge lawmakers to stop the pursuit of new penalties against Iran while the U.S. and others are in the midst of nuclear negotiations with Tehran. In a news conference Friday, Obama said legislation threatening additional penalties could upend the delicate diplomacy.

"Congress should be aware that if this diplomatic solution fails, then the risks and likelihood that this ends up being at some point a military confrontation is heightened — and Congress will have to own that as well," he said.

The president also is expected to cite his recent decision to normalize relations with Cuba, as well as defend the effectiveness of U.S. efforts to stop Russia's provocations in Ukraine and conduct air strikes against Islamic State fighters in Iraq and Syria.

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Associated Press writers Stephen Ohlemacher and Laurie Kellman contributed to this report.

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