2010: Get Ready for a Tax-a-palooza

Let’s face it, from a tax policy perspective, 2009 was a bust. Except for creating a bunch of new credits in the name of economic stimulus, Washington pretty much ignored the revenue code. 2010 will be very different. Facing trillions of dollars of expiring Bush-era tax cuts, President Obama and Congress will be forced to make some critical decisions in the new year. 

Since this is the season of lists, here are five big revenue issues to look out for in 2010.

1. Paying for Health Care: While the House and Senate health bills are remarkably similar in their fundamentals (despite the howling over the public option and abortion), there are big differences when it comes to taxes. The House would fund a big chunk of health care with a 5.4 percent surtax on those making more than $500,000 ($1 million for joint filers). By contrast, the Senate would raise the Medicare tax on people making $200,000 or more, impose an excise tax on high-cost health plans, and enact a kennel full of cats-and-dogs revenue-raisers. The most likely outcome: a split-the difference compromise that will raise taxes on high-earners and, for the first time, limit the tax subsidy for some employer-sponsored insurance policies.

2. The Bush tax cuts: Most expire at the end of 2010. Without action, tax rates would revert to their 2000 levels. But since his presidential campaign, Obama has vowed to extend nearly all of them. He’d also extend the Alternative Minimum Tax patch. However, he’d restore the 36 percent and 39.6 percent rates for most top-bracket taxpayers and boost the 15 percent rate on capital gains and dividends to 20 percent for those making more than $250,000. This will set off another nasty partisan battle in Congress along the lines of “You’re raising taxes. We are not. You are too.” But lawmakers are likely to go along with most of it (Remember, Republicans can’t filibuster. No action means all the Bush tax cuts die.

3. The estate tax: As of January 1, this tax is repealed for one year, after which the old 2001 rules will apply (a 55 percent rate on the value of estates above $1 million). Before it left for the holidays, the House agreed to a 45 percent levy on estate assets in excess of $3.5 million. The Senate, however, did nothing. Democratic leaders promise to fix this mess early in 2010 and make any changes retroactive to January 1. 

4. The Budget: Obama is going to have to pull off an incredibly delicate fiscal balancing act. The economy is slowly but steadily improving. Yet unemployment—the indicator that matters most to politicians running for reelection– remains stubbornly high. So while White House aides will continue to talk about deficit reduction, Obama’s focus will be on more stimulus. But he is aware that international bond markets are getting increasingly worried about fiscal deficits (just ask the Greeks or the Irish).

And here is where the math fails the president. Extending the Bush tax cuts (except for the highest earners), patching the AMT, restoring the estate tax parameters to 2009 levels, and continuing Obama’s signature Making Work Pay tax credit will slash Treasury revenues by at least $2.5 trillion over the next decade. Obama can cut spending or find other taxes to raise, but he'll make long-term deficit reduction that much harder by first digging the hole even deeper.

5. Tax Reform. One solution could be broad-based tax reform. But not in 2010. Obama has shown little interest and the post-health reform Congress will be too exhausted.

Still, while the conventional wisdom says Congress hates to confront big tax issues in election years, it looks increasingly as if it will have no choice in 2010.