President Obama released his budget proposal yesterday, and as expected, it included a number of new provisions that would dramatically change the tax laws once more, with impacts on taxpayers up and down the income scale. The Obama proposal comes as a clear disappointment to anyone who believed that the resolution to the fiscal cliff crisis at the beginning of the year would prove to be the last word on the tax front, but for those who want to see further revenue increases as part of a broader solution to address the national debt, the budget's tax provisions address some of their concerns.

Let's take a look at some of the budget's most important tax proposals and the impact they could have on both individual and corporate taxpayers, as well as the businesses that serve them.

Limited tax savings for itemized deductions and municipal-bond interest
The biggest revenue-raising part of the Obama budget would limit the value of itemized deductions, including the mortgage interest deduction, to 28%. That would impact only high-income taxpayers above the $200,000 and $250,000 income thresholds for single and joint filers, respectively, costing them as much as 11.6 percentage points in tax savings. Because of the high-end focus, the impact on industries like the homebuilding sector that benefit from customers taking advantage of those deductions would be limited, with luxury-oriented companies Toll Brothers (TOL 0.40%) and Ryland (NYSE: RYL) more at risk than homebuilders aimed at lower price points.

Implementing the Buffett Rule
The budget also wants to ensure that those with taxable income above the $1 million mark pay an effective tax rate of 30%. The mechanics of implementing what's become known as the Buffett Rule would include a phase-in of the tax for incomes between $1 million and $2 million, representing a further increase for those highest-income taxpayers with extensive deductions other than charitable contributions.

Lower inflation adjustments for tax-related provisions
The same proposal to link Social Security benefits to the chained Consumer Price Index would also have an impact on taxes. The budget would use the chained CPI to adjust tax brackets, personal exemptions, and standard deductions, leading to slower increases in those figures going forward. Unlike the limits on itemized deductions, the inflation adjustment provisions would affect all taxpayers.

Maximum amounts in IRAs and other retirement accounts
The budget would limit IRA, 401(k), and other tax-favored retirement balances to about $3 million. Combined with increases on carried-interest tax rates, this provision would capture hedge-fund managers and other investors who've used retirement accounts as successful high-growth investing vehicles.

A new cigarette tax
The Obama budget would hike federal taxes on cigarettes by $0.94 per pack. Altria (MO -0.36%) and other cigarette manufacturers would inevitably get hurt by such an increase, as it would add yet another impediment to cigarette demand that has already been falling sharply for decades.

Lower estate tax exemptions
The budget would reduce the current $5.25 million estate tax exemption to $3.5 million and push the top tax rate from 40% to 45%. That's still an improvement from what the estate tax would have looked like without the fiscal cliff compromise, with roughly $1 million exemptions and 55% top tax rates. But the failure to index the $3.5 million figure to inflation will create a need to revisit the issue repeatedly, which is a far cry from the certainty that inflation-indexing gave estate planners earlier this year.

Reduced tax preferences for energy production
Under current law, ExxonMobil (XOM 0.43%), Chevron (CVX 0.25%), and other energy producers are eligible for several tax benefits, including expensing for intangible drilling costs, percentage-based depletion for wells, and the domestic manufacturing tax deduction. The budget would remove these provisions.

Lower corporate taxes
The budget calls for broad reform of the corporate tax in an effort to cut its rate from 35% to 28% for most companies. Exactly how that reform would take place isn't entirely clear, but the general idea is to expand the base of money subject to tax to offset any rate reduction and keep the overall impact revenue-neutral.

Some limited tax breaks
The Obama budget also uses the tax laws to reward certain behavior. They include:

  • Making current educational tax credits permanent.
  • A 10% tax credit for small businesses to hire new employees or boost what they pay existing employees.
  • Tax credits to encourage employers to create retirement plans and automatically enroll their workers in those plans.
  • Special tax treatment for business investment and hiring targeted in certain high-poverty areas.
  • Tax incentives for education bonds used for building public schools.

Don't panic -- yet
Shares of tobacco companies like Altria, homebuilders like Toll Brothers and Ryland, energy giants Exxon and Chevron, and other businesses that would be hit by the budget proposal didn't drop dramatically yesterday. Moreover, the municipal bond market actually gained ground on a bad day for the bond market overall.

The lack of panic shows just how low a probability most people put on the Obama budget ever becoming reality. But as a sign of where the initial battle lines are drawn, knowing what the Obama budget means for your taxes can help you plan for likely compromise positions down the road.