Tax Reform: Congressional Reality or a Congressional Myth? Eric Grey, Director, Government Relations

Transcription

1 Tax Reform: Congressional Reality or a Congressional Myth? Eric Grey, Director, Government Relations

2 Current Budget Outlook The Congressional Budget Office (CBO) last Tuesday released its latest long-term budget projections. The report predicts that debt held by the Federal government will decrease in the relative shortrun before increasing to highs not seen since the end of World War II. If current laws generally remained in place, federal debt held by the public would decline slightly relative to GDP over the next several years, the Congressional Budget Office (CBO) projects. After that, however, growing deficits would ultimately push debt back above its current high level. CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038, 25 years from now Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely, the report states.

3 Deficit Expected to Dip But Remain High In Next Decade Surplus U.S. Deficit and Surplus (Billions of Dollars) Recorded deficit Projected deficit Projected Budget Deficit $845B in FY 2013 $978B in FY 2023 Deficit Analysis The CBO projects that the FY 2013 budget deficit will be smaller than deficits registered in past four years assuming continuation of current laws governing taxes and spending Beginning in FY 2016, the CBO estimates that budget deficits will increase due to rising health care costs, interest payments on federal debt and an increase in federal subsidies for health insurance 3

4 Federal Debt Projected to Increase By 50% in Next Decade Federal Debt Held by the Public $25T Recorded Debt Projected Debt $20T $15T $10T $5T $0T Analysis CBO projects federal debt will increase by 50% between 2014 and 2023 Entitlement spending on programs such as Medicare, Medicaid and Social Security will drive debt in the next decade Source: Congressional Budget Office, May 2013.

5 CBO Projects Over $25 Trillion in Entitlement Expenditures Through 2023 T T T T T T T T Projected Entitlement Expenditures (In Billions) $1.4 T $1.1 T $0.6 T Analysis Social Security expenditures are estimated to account for almost one-fourth of government spending in 2014 Medicaid spending is projected to rise steadily in part because many states intend to expand Medicaid coverage under the Affordable Care Act Social Security spending is projected to total $11.9T for 2013 to 2023, Medicare will total $8.7T and Medicaid will total $4.6T over the same time period 5

6 Fiscal Cliff Compromise: Bringing in the New Year! Made permanent most of the Bush Tax Cuts for those individuals making below $400,000/ $450,000 for families. Made permanent the 15% dividend/capital gains tax rates for those individuals making $400,000 / $450,000 for families Permanently fixed the Alternative Minimum Tax Raised tax rates for those individuals making $400,000 / $450,000 for families. (Reverted back to Pre-Bush Tax Cuts rates.36% & 39.6%) Raised the dividend/capital gains tax rate to 20% for those individuals making over $400,000 / $450,000 for families. Contained a 3 month Continuing Resolution. Final compromise was NOT fully offset.

7 Fiscal Cliff Deal Projected to Add Trillions to Deficit Effects of the American Taxpayer Relief Act of 2012 on the Deficit $0T $-0.4T $-0.8T $-1.2T $-1.6T Analysis The American Taxpayer Relief Act of 2012 made certain tax provisions permanent, including the child tax credit and, for most taxpayers, a 15% tax rate on long-term capital gains realizations and dividends* The extension of these tax provisions will add $3.9T to the deficit in the next decade *For high-income taxpayers, the ATRA raised the top rate on dividends and capital gains to 20% Source: Congressional Budget Office, Historical Tables; Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years to 2023, February 5, 2013.

8 Potential Drivers of Tax Reform Retirement of Senate Finance Chairman Max Baucus (D-MT) Term Limited Ways & Means Chairman Dave Camp (R-MI) Headline news stories on companies not paying their fair share when it comes to taxes Apple, International Tax Haven agreements, Utilities, etc etc Slow Economic Improvement Business Community Support Coalitions Form Public Support for Tax Simplification Political Consensus on Corporate Tax Reform Tax Gap - Treasury Inspector General for Tax Administration Report

9 Reality? Political Insider Poll Question: What are the prospects that this Congress will pass a major tax-reform bill? Results: Democrats (95 votes) 39% Fair Chance, 56% Poor Republicans (101 votes) 33% Fair Chance, 58% Poor

10 Tax Reform Loses Steam in 2013 Tax Reform Momentum in 2013 Corporate coalitions form to advocate for tax code overhaul Senate Finance Cmte. shifts focus to IRS scandal House Ways and Means Cmte. Chairman Dave Camp (R-Mich.) flirts with but decides against Senate run Congressional momentum on tax reform Sequester diverts lawmakers attention Fiscal cliff deal meets some Democrats aim of raising taxes on wealthy; eases widespread push for reform Senate Finance Cmte. Chairman Sen. Max Baucus (D-Mont.) announces retirement Senators asked to submit confidential proposals on which tax breaks to keep Congress resumes; budget is top priority Analysis House Ways and Means Cmte. Chairman Dave Camp (R-Mich.) announced in 2012 that his panel would pass tax reform legislation in 2013, but sequestration, the IRS scandal, and budget negotiations have waylaid progress Lawmakers and Washington insiders don t expect movement on tax reform in 2013 due to other legislative priorities, sharp ideological divides on revenue, and little support from leadership on either side of the aisle Sources: Nancy Cook, Tax Reform Faces Long Odds Even With Dave Camp at the Helm, National Journal, Aug. 17, 2013; Brian Resnick, The Senate s Attempt at Tax Reform Couldn t be Less Transparent, National Journal, July 25, 3013; Nancy Cook, Tax Reform s Latest Offshoot Corporate Coalitions, National Journal, July 17, 2013.

11 Challenges of Tax Reform: Complexity Personal Taxation of Health Benefits Marginal Rates Capital Gains and Dividends Mortgage Interest Deduction Charitable Deduction Child Tax Credit Earn Income Tax Credit Low-Income Housing Tax Credit Alternative Minimum Tax Corporate R&D Expensing Interest Deduction Depreciation LIFO Section 199 Manufacturing Deduction Energy Tax Credits Oil & Gas Tax Credits International Taxes Transition Rules

12 Challenges of Tax Reform: Ideas, the Media and Politics Tax Ideas VAT or Consumption Tax FAIR Tax Carbon Tax Territorial Tax System Flat Tax Lower the Rate, Broaden the Base Fox News MSNBC Talk Radio Politics Huffington Post Americans for Tax Reform Election Day Nov. 4 th, 2014 Primary Elections

13 Challenges of Tax Reform: Timing Congressional Schedule Syria Fiscal Fights: o Continuing Resolution o Debt Ceiling o Entitlement Reform Farm Bill Obamacare Keystone XL Pipeline Lack of Support from Congressional Leadership and the President

14 Major Challenge For Tax Reform: Revenue Neutral vs. Revenue Raising It has to be under the total understanding that this can't be revenue-neutral, Reid said at a news conference. It can't be even close to neutral. It has to be a significant tax target, and we've talked about that. I believe in that. I think it's important. Majority Leader Harry Majority Leader Harry Reid (D-NV) The $975 billion figure, Schumer said, would be a good target to aim for as part of tax reform. To just have a hundred million or so, that's not going to cut it. Sen. Charles Schumer (D-N.Y.) "Our nation faces long-term fiscal challenges due to the projected path of entitlement spending, not due to a lack of tax revenue. - Senate Finance Ranking Member Orrin Hatch (R-UT) "That kills it..,".we're not going to do that." He noted that Republicans agreed to $600 billion in tax increases on wealthier Americans in the year-end compromise to avert the so-called fiscal cliff, which would have imposed tax increases on all taxpayers. Sen. John Cornyn (R-TX)

15 Current Landscape House In striking a bipartisan theme, Ways & Means Chairman Dave Camp (R-MI) and Ranking member Sandy Levin (D-MI) announce the creation of tax reform working groups both Republican and Democrat committee members earlier this year tasking them to produce reports to the committee. Chairman Camp announces that he would like to begin the tax reform debate in committee sometime between the Continuing Resolution and Debt Limit debates (Late September - Early October) and then hopefully pass it by the end of this year. Ways & Means Committee concluded Republican briefings on potential tax reform ideas/options. Best quote concerning the potential legislation, The draft legislation will have great support for those Congressmen who do not have any realtors or charities in their districts Rumored plan consists of a 25% corporate rate and a 25% top personal rate. House Majority Leader Eric Cantor releases a memo earlier this month to the Republican caucus outlining the legislative agenda for the Fall. Notably absent from the agenda was tax reform.

16 Current Landscape Senate On June 27 th, Chairman Baucus and Ranking Member Hatch sent out a Dear Colleague letter to all Senators describing their blank-slate approach to tax reform and requested input from all Senators on which provisions should be retained in the tax code. Deadline for submittal was July 26 th. According to reports, approximately 60 Senators provided varying degrees of responses to the Senate Finance Committee. It is our understanding that a majority of the Senators kept their responses to a high level with only a couple of Senators actually providing a list of specific expenditures to retain. While the Chairman and Ranking Member s efforts somewhat breathed life back into potential tax reform, Majority Leadership Harry Reid kindly deflated the balloon with this quote - "I'm not going to do it. I'm not even going to consider it. and insisted that tax reform has to start with raising revenues. Senate Finance Committee staff are currently meeting with members of the committee and our rumored to be drafting legislation or a Chairman s mark. Early rumors are that the committee would produce something towards the end of October/early November.

17 Current Landscape Administration President Obama released a blueprint for corporate tax reform in February of 2012 which laid out the Administration s plan closing of tax loopholes, reduction of the corporate rate to 28%, 25% rate for manufacturers for tax reform but included very little detail. In an effort to boost the idea of tax reform and aid Chairman Baucus efforts another version of corporate tax reform was released by the Administration which was almost the same exact plan as the one which was released in February.??????????

18 Future Landscape - Where will we go?

19 Potential Paths Forward House Republicans attach binding tax reform language to the upcoming debt limit increase. Likelihood 35% Congress makes half-loaf tax reform push corporate only during a lame duck session after the 2014 election. Likelihood 25% Ways and Means Chairman Camp garners support of both his Republican Leadership and Caucus, in turn, passing it through in the House. Likelihood 15% Senate Finance Chairman Baucus garners support of the Democratic Caucus and passes reform. Likelihood 0%

20 Questions?