FEDERAL TAX CODE REFORM: WHAT WOULD IT GIVETH AND TAKETH AWAY?

Transcription

1 FEDERAL TAX CODE REFORM: WHAT WOULD IT GIVETH AND TAKETH AWAY? Matt Dolan Tax Attorney Federal Policy Group TUESDAY, AUGUST 12, 2014 MODERATOR Harold Wolle, Jr., Director Minnesota Corn Growers Association

2 Tax and Budget Policy Outlook Minnesota Ag Leadership Conference Brainerd, MN August 12, 2014 Matt Dolan Director Federal Policy Group

3 Page 3

4 Page 4

5 Page 5

6 Page 6

7 Page 7

8 Page 8

9 Page 9

10 Page 10

11 Page 11

12 Page 12

13 Page 13

14 The Interest Rate Time Bomb Federal Net Interest Expense Year Billions $221 $233 $268 $326 $404 $493 $569 $635 $694 $755 $819 % of GDP Total Fed Spending (Billions) % of Total Spending 10-year Treas Notes $3,454 $3,543 $3,783 $4,020 $4,212 $4,425 $4,684 $4,939 $5,200 $5,522 $5, % 6.5% 7.1% 8.1% 9.6% 11.1% 12.1% 12.6% 13.3% 13.7% 14.2% Source: CBO Baseline Budget Outlook, February, 2014 Page 14

15 Template for Tax Reform: Lower Rates, Broader Base Both parties have proposed funding tax reform through limiting tax deductions, credits, or other preferences: Democrats want to use the additional revenues to offset the cost of more spending and certain tax code changes (but not rate cuts), with the remainder, if any, to be applied toward deficit reduction. In the aggregate, the President and Senate Democrats both have proposed net tax increases of roughly $1 trillion over ten years. Republicans want to use the additional revenues to offset the cost of substantial rate reductions, with a targeted top marginal rate of 25%, and other tax code reforms. In the aggregate, the Republican package of tax increases and tax cuts would be roughly revenue neutral. Page 15

16 Targeting Tax Expenditures Selected Tax Expenditures Tax Revenue Cost ( ) Health Care Benefits Exclusion Reduced Rates on Investment Income State and Local Tax Deductions Home Mortgage Deduction Earned Income Tax Credit Child Tax Credit Charitable Deduction $ 785 billion $ 633 billion $ 316 billion $ 405 billion $ 353 billion $ 286 billion $ 251 billion Source: Joint Committee on Taxation Estimates of Federal Tax Expenditures for Fiscal Years , August 5, 2014 Page 16

17 Chairman Camp Tax Proposals On February 26, 2014, House Ways and Means Chairman Dave Camp (R-MI) released the Tax Reform Act of 2014, his proposal for comprehensive tax reform. Major corporate tax provisions include: Reduces the Top 35 percent Corporate Tax Rate to 25 percent over 5 years. Provides new Thin Capitalization rules that restrict the deduction for interest expense for U.S.-based multinational companies when they are more heavily leveraged than other companies. Repeals the modified accelerated cost recovery system (MACRS) and lengthens depreciation lives for property placed in service after December 31, Requires amortization of certain advertising expenses beginning in Repeals the corporate alternative minimum tax. Page 17

18 Chairman Camp Tax Proposals (continued) Major individual tax provisions include: Creates a 10 percent surtax for Individuals that applies to a modified definition of adjusted gross income (MAGI) above $400K for singles and $450K for married couples. o The Top Rate for Employees would be 37.35% o The Top Rate for Self-Employed would be 38.8% Increases the standard deduction and repeals personal exemptions for Individuals. Eliminates the deduction for state and local taxes and reduces the principal cap associated with deductible home mortgage interest payments for new mortgages from $1 million to $500,000. Provides a 40 percent exclusion on capital gains and dividend income; the current 3.8 percent tax on investment income would still also apply. Page 18

19 Congressional Checklist and Schedule for 2014 The House is scheduled to be in session only 43 more days prior to the election. The Senate schedule, though not finalized, is similar. Congressional To Do List: Continuing Resolution for Fiscal Year 2015 Extend Terrorism Risk Insurance Tax Extenders Inversion Legislation? Page 19

20 Possible Inversion Initiatives The U.S. corporate tax code has two features that make it uniquely burdensome: The U.S. has the highest corporate income tax rate in the developed world Unlike almost all OECD countries, the U.S. taxes domestic companies on foreign earnings Over several decades, a handful of U.S. companies have "inverted", thus becoming foreign companies. Doing so meant that they were taxed the same as foreign companies doing business in the U.S., that is, they pay U.S. tax on their U.S. earnings, but not their foreign earnings. In recent months, several large U.S. companies, such as Medtronic, Pfizer, or Walgreen's, have been reported to be entering into, or considering, inversion transactions. Congress passed legislation in 2004 (Internal Revenue Code section 7874) governing how inverted entities are to be taxed. Some Democratic leaders advocate further restrictions, while Republicans generally favor addressing the problem by reforming the U.S. tax code to make it more competitive. President Obama is considering taking executive action on his own. Page 20

21 Senate Up for Grabs (Currently 55D, 45 R) Category Toss Up Lean Republican Likely Republican Lean Democrat Likely Democrat Senators Mary Landrieu (D-LA) Mark Begich (D-AK) Kay Hagen (D-NC) Mark Pryor (D-AR) Tom Harkin (D-IA) (open) Saxby Chambliss (R-GA) (open) John Walsh (D-MT) Mitch McConnell (R-KY) Tim Johnson (D-SD) (open) Jay Rockefeller (D-WV) (open) Mark Udall (D-CO) Al Franken (D-MN) Jeanne Shaheen (D-NH) Mark Warner (D-VA) Jeff Merkley (D-OR) Carl Levin (D-MI)(open) Source: University of Virginia Center for Politics (July 24, 2014) Page 21

22 The 2015 Must-do List Medicare Doc Fix Expires March 31, 2015 Debt Ceiling Expires March 15, 2015 Continuing Resolution for Fiscal Year 2016 Social Security Disability Fund on track to go broke in 2016 Page 22