President Proposes Increase in Capital Gains Tax and Bank Tax in State of the Union Address

In conjunction with President Obama's State of the Union address to Congress, the White House issued a Fact Sheet that proposed raising the top tax rate on capital gains to 28% and ending the "stepped-up basis" rule for the "wealthiest" Americans. It also proposed the imposition of a seven-basis-point fee on the liabilities of large U.S. financial institutions with assets over $50 billion. According to the Fact Sheet, revenue from such changes would be used to increase funding for new earned income credits, expanded child care credits and increased credits for college education.

Under current law, capital gains on an asset held at the time of a taxpayer's death are "stepped up" to the asset's fair market value as of the date of death, allowing the taxpayer's heirs to sell the asset without a capital gains tax. The President proposed to close this "loophole" by treating bequests and gifts other than to charitable organizations as taxable realization events. This proposal would exempt capital gains of up to $200,000 per couple, plus an additional $500,000 exemption for gains on sales of personal residences by couples. In addition, no capital gain tax would be incurred on transfers to spouses until the death of the second spouse.

The President also proposed to raise the top tax rate on long-term capital gains and dividends to 28% for couples with incomes above $500,000. The current maximum rate (including the 3.8% "Medicare tax") is 23.8%.

The proposed fee on large banks and other financial institutions would impact approximately 100 firms and lead such firms to make decisions to reduce the risk of major defaults that could entail widespread economic costs, according to the Fact Sheet issued by the White House. Former Ways Means Chairman Dave Camp, a Republican, proposed a somewhat similar bank fee in his comprehensive draft tax reform proposal in 2014.

Republican leaders in Congress dismissed the President's proposals as "non-starters" and "mere rhetoric." In the official Republican response to the State of the Union, Senator Joni Ernst (R-IA) rejected any tax increases and instead called for comprehensive tax reform that would reduce tax rates for all Americans and grow the economy.

SIFMA also opposes the President's proposals. In a press release issued prior to the President's speech, SIFMA rejected any increase in the capital gains rate, which according to SIFMA is already "among the highest integrated capital gains and dividends rates in the developed world." According to SIFMA, the proposed fee on large banks and other financial institutions "could have far-reaching unintended consequences that will curtail economic growth and job creation while negatively impacting the allocation of credit and the provision of financial services to individuals and institutions."

See: White House Fact Sheet on Proposed Tax Code.See also: SIFMA Statement; MFA Statement; Transcript of State of the Union Address.