This article is part of our President’s FY2025 Budget Request Coverage. Visit our Rolling Analysis Page for more.

The Biden administration has proposed a plan to reduce the deficit by approximately $3 trillion over the next decade through a series of tax reforms and spending cuts.

One of the key proposals is to implement a 25% minimum tax on the wealthiest 0.01% of Americans, those with wealth exceeding $100 million. This is meant to address the issue of many wealthy individuals paying lower tax rates than ordinary wage earners due to loopholes and tax preferences.

The plan would also extend the solvency of the Medicare Hospital Insurance (HI) trust fund indefinitely by modestly increasing the Medicare tax rate on incomes above $400,000, closing loopholes in existing Medicare taxes, and directing revenue from the Net Investment Income Tax into the HI trust fund.

Additionally, the administration proposes to repeal tax cuts for the wealthiest Americans introduced in the 2017 tax law, restoring the top tax rate to 39.6% for those earning more than $400,000 annually. It also aims to tax capital gains at the same rate as wage income for those with incomes over $1 million, closing the capital gains and carried interest loopholes. The budget also proposes to close estate tax loopholes.

For large corporations, the plan includes raising the corporate tax rate to 28% and the corporate minimum tax to 21%, as well as increasing the excise tax on corporate stock buybacks. It would reform the international tax system, reducing incentives for booking profits in low-tax jurisdictions, stopping corporate inversions to tax havens, and raising the tax rate on U.S. multinationals’ foreign earnings from 10.5% to 21%.

The administration’s plan also proposes ending various tax provisions that allow oil and gas companies to benefit from generous deductions that significantly reduces their tax liabilities. Some of these tax provisions were written into the tax code over a century ago:

• Intangible Drilling Costs (IDCs): Oil and gas companies can currently deduct a significant portion of their costs associated with drilling new wells. These costs are considered “intangible” because they do not result in a tangible asset. The costs include labor, chemicals, mud, grease, and other miscellaneous items necessary for drilling. The administration’s proposal to eliminate the deduction for IDCs could generate significant revenue, as these costs generally constitute a large percentage of the total cost of drilling a well.
• Percentage Depletion Allowance: This tax break allows independent producers to deduct a fixed percentage of the gross income from oil and gas wells, regardless of the actual investment in the well. This is in contrast to cost depletion, which is the deduction of actual investment costs over time as the resource is depleted. The administration’s budget proposes to eliminate percentage depletion, which would prevent producers from deducting more than their actual investment in a well.
• Dual Capacity Taxpayer: Dual capacity taxpayers are U.S. companies that operate in foreign countries and are subject to foreign taxes. The U.S. tax code allows these companies to claim a credit for foreign taxes paid against their U.S. tax liability to avoid double taxation on the same income. The dual capacity rules are designed to prevent companies from claiming credits for payments to foreign governments that are actually for specific economic benefits, such as royalties for the extraction of natural resources, rather than bona fide income taxes.
• Special Rule for Foreign Fossil Fuel Income: The Special Rule for Foreign Fossil Fuel Income, specifically regarding Foreign Oil and Gas Extraction Income (FOGEI) and Foreign Oil Related Income (FORI), plays a significant role in the taxation of income generated from the extraction and sale of fossil fuels outside the United States. Under the current law, FOGEI is excluded from the Global Intangible Low-Taxed Income (GILTI) rules introduced by the Tax Cuts and Jobs Act (TCJA). The exclusion of FOGEI from GILTI means that income from foreign oil and gas extraction can be repatriated without being subject to U.S. taxation. The administration’s proposal seeks to modify this treatment by subjecting FOGEI to GILTI rules and expanding the definitions of FOGEI and FORI to include additional types of income.

The White House projects that the elimination of these special domestic and international tax treatment for oil and gas company investments would save $110 billion. However, these proposals will face challenges in Congress, where there is significant opposition to changing the tax treatment of the oil and gas industry. The budget also targets other fossil fuel tax preferences, which include deductions and credits for specific activities or investments in the fossil fuel industry. These preferences have been criticized for encouraging investment in fossil fuels over cleaner energy sources.

Read more about fossil fuel tax break cut here.