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Tax Legislative Update
Andrew Prior, Managing Director,
Washington National Tax Services
Factors affecting US tax policy
PwC | Tax legislative update
2
Case for US tax reform
High statutory corporate tax rate and uncompetitive international
tax system
Changes in global tax environment since last US tax reform effort 1988-2015
30
28
Number of Territorial Countries in OECD
25
20
14.4
15
10
8
5
Excess of US Combined Statutory Corporate Tax
Rate over OECD Average (excluding US)
0
-5
-5.7
PwC | Tax legislative update
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
-10
3
US economic outlook
GDP growth forecast – 2% versus 3% historical average
4.0
Annualized growth in real GDP
3.0
Blue Chip Forecast
3.1
2.5
2.0
2.4
2.2
2.6
1.7
1.6
2.2
2.2
2.1
2017
2018
20192027
1.5
1.0
0.0
-0.3
-1.0
-2.0
-3.0
-2.8
-4.0
19682007
Avg
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Bureau of Economic Analysis, July 2016, and Blue Chip Indicators, August 10 and April 10, 2016.
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US federal budget outlook
Spending growth is outpacing revenue growth
26.0
2015
outlays
20.7%
50-yr historical
average
outlays 20.2%
24.0
Projected
outlays
23.1%
Percentage of GDP
22.0
20.0
18.0
Projected
revenues
18.2%
16.0
50-yr historical
average revenues
17.4%
14.0
2015 revenues
18.2%
12.0
1966
1976
1986
1996
2006
2016
2026
Source: Congressional Budget Office, The Budget and Economic Outlook: 2016 to 2026 (January 2016); PwC calculations.
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US federal budget outlook
Spending growth due to Social Security, major health programs
and interest
2016
30
2046
Net Interest 5.8%
25
Share of GDP
Deficit (8.8%)
20
Net Interest 1.4%
Deficit (2.9%)
Other Revenues 1.7%
15
Other Noninterest
Spending
9.2%
Major Health Care
Programs
5.5%
5
Other Revenues 1.5%
Corporate Tax 1.6%
Corporate Tax 1.8%
Payroll Tax
5.9%
10
Other Noninterest
Spending
7.3%
Individual Tax
8.8%
Social Security
4.9%
Major Health Care
Programs
8.9%
Social Security
6.3%
Payroll Tax
5.8%
Individual Tax
0.5%
0
Spending
Revenues
Spending
Revenues
Source: Congressional Budget Office, The 2016 Long-Term Budget Outlook (July 2016).
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PATH Act – 2015 year-end tax extender package
Permanent Tax Extenders (22)
Expiring in 2016 (30)
Expiring in 2019 (5)
Other Provisions
•
Research credit
•
•
Subpart F exceptions for active
financing income
Bonus depreciation (subject to
phasedown) and election to
accelerate AMT credits
•
•
199 deduction for income from
domestic production activities
in Puerto Rico
Medical device excise tax
suspended for 2016 and 2017
•
•
Electricity production and
investment credit for non-wind
renewable power facilities
•
CFC look-through treatment
•
Electricity production and
investment credit for wind
renewable power facilities
Excise tax on high-cost
employer-provided health
benefits (“Cadillac tax”)
delayed until 2020
•
FIRPTA provisions, including
exclusion for foreign pension
and retirement funds investing
in US real estate
•
REIT provisions, including
restrictions on tax-free spinoffs
•
Section 179 expensing limits
•
15-year cost recovery for
qualified leasehold, restaurant,
•
and retail improvements
•
•
Deduction for state and local
sales taxes
Exclusion parity for employerprovided mass transit and
parking benefits
•
Deduction for qualified tuition
and related expenses
•
Interest deduction for
mortgage insurance premiums
•
Exclusion for discharge
of indebtedness on
principal residence
•
Charitable giving provisions
(e.g., tax-free charity
IRA rollover)
•
Expanded child credit, EITC
•
and American Opportunity Tax
Credit provisions
PwC | Tax legislative update
Additional renewable
energy and energy
efficiency provisions
•
Work Opportunity Tax Credit
•
New Markets Tax Credit
Medical expense deduction:
7.5% AGI floor for individuals
age 65 and older
7
Post-election tax policy outlook
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A “perfect storm” for business tax reform?
Pre-election focus on divided government and opportunity for
incremental reform
“I think the combination of Europe moving pretty aggressively on the state aid issue and
the…bipartisan desire to find a way to pay for more aggressive infrastructure creates perhaps the
perfect storm where you can overcome the inertia of inaction.”
– Treasury Secretary Jack Lew (October 6, 2016)
Total IRF earning balances (US $ Billion)
2,119
2,299
2,434
1,885
1,630
1,098 1,188
1,363
“We feel there’s one
catch phrase that
sums up EU State
aid rulings.”
2008 2009 2010 2011 2012 2013 2014 2015
www.AuditAnalytics.com
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2016 election results – Republican sweep
Increased potential for major US tax law changes in 2017
306 trump
Clinton
232
2016 Elections – Final results as of Nov. 28,11 AM ET
US House
46.5% votes | 62,352,375
270 electoral votes to win
US Senate
64,429,062 | 48.1% votes
188
2014
46
247
2014
1
3
193
2016
Republicans
Democrats
Undecided
2016 Net change
PwC | Tax legislative update
48
239
Republicans
*includes
54
2014
247
188
Democrats
2016
239
193
3
House Ds +6
2016
51
Undecided
2014 2016
Republicans
54
51
*
Democrats
46
48
Undecided
1
2016 Net change Senate Ds +2
two Independents: Senators Bernie Sanders (I-VT) and Angus King (I-ME)
10
President-elect Trump’s first 100 days agenda
Tax reform may have to compete with other Administration priorities
• Tax reform
• Health care reform (ACA repeal
and replace)
• Infrastructure
• Trade (NAFTA, TransPacific Partnership)
• Financial regulation (D0dd-Frank)
• Energy (Keystone pipeline)
• Environmental de-regulation
• Immigration
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Key dates affecting tax legislative agenda
2016
• November 8
Election Day
• November 15
114th Congress “lame duck” session began
• December 9
Temporary government funding measure (“continuing resolution” or “CR”) expires
• December 16
Target adjournment date
2017
• January 3
New Congress (115th) begins
• January 20
Inauguration Day
• January/February
President delivers annual State of the Union address
• February 6
Deadline for submission of Administration’s FY 2018 budget
• March 15
Suspension of federal statutory debt limit expires
• April 15
Deadline for adoption of Congressional budget “resolution”
• August
Congressional summer recess period
• September 30
FAA authorization and Airport and Airway Trust Fund taxes expire
• October 1
New federal government fiscal year (FY 2018) begins; “sequestration”
spending caps reinstated
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Comparison of Republican individual
tax reform proposals
2014 Camp Tax Reform Bill
House GOP Tax Reform Blueprint
President-Elect Donald Trump
Individual tax rate
10% and 25% with 10% surtax on
modified AGI
12%, 25% and 33%
12%, 25%, and 33%
Individual AMT
Eliminate
Eliminate
Eliminate
Investment income
•
Tax capital gains and dividends
as ordinary income with
40% exclusion
•
•
20% top tax rate on capital gains,
dividends and interest
•
Eliminate 3.8% net investment tax
•
Tax carried interest as
ordinary income
•
Tax “carried interest” as
ordinary income
Standard deduction
$22,000 (joint) and $11,000 (other)
•
Tax capital gains, dividends, and
interest as ordinary income with
50% exclusion (16.5% top
effective tax rate)
Modify tax treatment of
carried interest
$24,000 (joint), $18,000 (single with
child), and $12,000 (other)
$30,000 (joint) and $15,000 (single);
no head of household filing status
Itemized deductions Limits or repeals many current-law
deductions, including mortgage
interest ($1 million cap gradually
reduced to $500,000) and charitable
contributions (2% floor)
Eliminate all except mortgage interest
and charitable contributions
Limit to $200,000 (joint filer) and
$100,000 (single filer)
Estate tax
Eliminate
Eliminate and tax capital gains held
until death with $5 million per-person
exemption ($10 million per couple)
Two tax rates: 25% and 35%
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Comparison of Republican business
tax reform proposals
2014 Camp Tax Reform Bill
2016 House GOP Blueprint
President-Elect Trump
Corporate tax rate
25% with 5-year phase-in
20%
15%
Corporate AMT
Repeal
Repeal
Repeal
Pass-thru business
tax rate
Current law
25% pass-thru business tax rate with
“reasonable compensation” taxed as
ordinary tax rates
Election to apply 15% rate, with large
pass-thru subject to dividend tax rate
on retained earnings
Cost recovery
Repeal MACRS and implement ADStype system with inflation adjustment
100% expensing for equipment and
real property (not land)
100% expensing election for US
manufacturers
Interest expense
deduction
Adopt thin capitalization rules and
tighten earnings stripping rules
Deductible only against net interest
income; special rules for financial
services
No deduction for US manufacturers
that elect full expensing
Domestic
production
(section 199)
Phase out and repeal section 199
Repeal section 199 deduction
Eliminate most business tax
preferences
Research &
development
Permanent alternative increment
research credit and 5-year
amortization
Business credit to encourage R&D
Maintain R&D credit
Foreign repatriation
One-time mandatory tax (8.75% cash
and 3.5% other) with 8-year
payment period
One-time, mandatory tax (8.75%
cash and 3.5% other)
10% one-time, mandatory tax
International tax
95% dividend exemption system
100% dividend exemption system;
border adjustment that exempts
exports and taxes imports
Not stated
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Comparison of Republican tax reform proposals
Tax
CBO Baseline 2016 House GOP Blueprint
(billions of dollars,
2016 – 2025)
“Static”
“Dynamic”
President-Elect Trump*
“Static”
“Dynamic”
Individual Income Taxes
20,265
(981)
566
(2,192)/(3,730)
(1,058)/(2,458)
Payroll Taxes
13,025
0
683
0
520/612
Corporate Income Taxes
3,634
(1,197)
(1,324)
(1,936)
(1,958)/(1,959)
Excise Taxes
1,059
0
57
0
44/52
(240)
(240)
(240)
(240)
Estate and Gift Taxes
263
Other Revenue
1,696
0
68
0
52/62
Total
39,942
(2,418)
(191)
(4,368)/(5,906)
(2,640)/(3,932)
Source: Tax Foundation (July and September 2016); Congressional Budget Office (August 2016)
* Includes two estimates for “higher-rate” and “lower-rate” assumptions regarding pass-through taxation
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Questions?
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Thank you
Andrew Prior, Managing Director, Washington National
Tax Services
Washington D.C.
(202) 414-4572
[email protected]
This document is for general information purposes only, and should not be used as a
substitute for consultation with professional advisors.
This document was not intended or written to be used, and it cannot be used, for the
purpose of avoiding US federal, state or local tax penalties.
© 2016 PwC. All rights reserved. In this document, "PwC" refers to
PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member
firm of PricewaterhouseCoopers International Limited, each member firm of which is a
separate legal entity.