View from Washington

Tax and Budget Policy in the Washington

Swamp as We Approach Another

Election Year

Iowa Bankers Association 2014 Bank Management Conference

Des Moines, Iowa

February 12, 2014

Kenneth J. Kies Managing Director

Federal Policy Group

Overview

Federal Fiscal Outlook Economic Outlook Looming Deadlines How is Obamacare doing? On to the 2014 Election Outlook for Tax Reform in 2014 – Is More

Redistribution Needed? Possible Game Changers

The Outlook for 2013

Federal Fiscal Outlook

Deficit Outlook Under CBO

$1,413$1,294 $1,300

$1,087

$680$514 $478 $539 $581 $655

$752$836 $912

$0$200$400$600$800

$1,000$1,200$1,400$1,600$1,800

An

nu

al

De

fic

it (

$ b

illio

n)

Fiscal Year

CBO Baseline

Source: CBO Baseline Budget Outlook, February, 2014 Source: CBO Baseline Budget Outlook, February, 2014

Federal Debt Outlook: White House

$16.1$17.0

$18.1$19.1

$20.0$20.9

$21.8$22.6

$23.4

$0

$5

$10

$15

$20

2012 2013 2014 2015 2016 2017 2018 2019 2020

Pu

blic

ly

He

ld D

eb

t ($

Tri

llio

ns

)

Fiscal Year

Total Federal Debt

Source: White House Updated Budget for Fiscal Year 2014, July 2013 Source: White House Updated Budget for Fiscal Year 2014, July 2013

Federal Debt Outlook: White House

106% 107% 107% 107% 106% 105% 104% 104% 103%

0%

20%

40%

60%

80%

100%

120%

2013 2014 2015 2016 2017 2018 2019 2020 2021Fiscal Year

Total Federal Debt (As % of GDP)

Source: White House Updated Budget for Fiscal Year Source: White House Updated Budget for Fiscal Year 2014, July 2013 2014, July 2013

Now Even Worse News

Entitlements Drive the Debt Higher

Federal Revenues Were Depressed As Well

Revenues as a percent of GDP have averaged 17.8 percent since 1950

Except for 2013, Revenues as a percent of GDP have been at their lowest level since 1950

FY- 2009 - 15.1%

FY- 2010 - 15.1%

FY- 2011 - 15.4% FY- 2012 – 15.7%

FY- 2013 – 18.4%

Revenues Continue to Recover

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

% of GDP 16.7 17.5 18.2 18.2 18.1 18.0 18.0 18.0 18.1 18.1 18.2

Source: CBO Baseline Budget Outlook, February, 2014 Source: CBO Baseline Budget Outlook, February, 2014

The Interest Rate Time Bomb

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Billions $221 $233 $268 $326 $404 $493 $569 $635 $694 $755 $819

% of GDP 1.3 1.3 1.5 1.7 2.0 2.4 2.6 2.8 2.9 3.1 3.2

Total FedSpending(Billions)

$3,454 $3,543 $3,783 $4,020 $4,212 $4,425 $4,684 $4,939 $5,200 $5,522 $5,749

% of Total Spending

6.4% 6.5% 7.1% 8.1% 9.6% 11.1% 12.1% 12.6% 13.3% 13.7% 14.2%

10-yearTreas Notes

2.4 3.1 3.7 4.3 4.8 5.0 5.0 5.0 5.0 5.0 5.0

Federal Net Interest Expense

Source: CBO Baseline Budget Outlook, February, 2014Source: CBO Baseline Budget Outlook, February, 2014

Putting the Debt in Perspective for Fiscal Year 2011

U.S. Tax Revenue: $2,314,000,000,000

Federal Budget: $3,597,000,000,000

New Debt: $1,283,000,000,000

National Debt: $14,698,625,550,307.37 (and counting)

Budget Cuts: $38,500,000,000

Source: The Congressional Budget Office, Treasury Department’s Bureau of Public Debt

Drop 8 Digits, the Debt becomes a Family Budget

Annual Family Income: $23,140

Money Family Spent: $35,970

New Credit Card Debt: $12,830

Credit Card Balance: $146,986.37 (and counting)

Budget Cuts: $385

The Real Kicker

“A federal budget compromise that was hailed as historic for proposing to cut about $38 billion would reduce federal spending by only $352 million this fiscal year, less than one percent of the bill’s advertised amount, according to the Congressional Budget Office.”

- The Washington Post, April 14, 2011

Translation:

The Family Budget was cut by $3.85, not $385

State of the Economy

States and Cities in Fiscal Crisis

States face trillions in pension funding shortfall (continued)

– The state pension situation is improving, but most plan funding is still low… On average, state pension plans are roughly 73 percent funded, according to Morningstar, an investor research company that puts together the annual report.

The Washington Post, September 17, 2013

10 states where the public pension fight is fierce (Unfunded Liability):

California ($100 billion), Illinois ($85 billion), Kansas ($9.2 billion), Kentucky ($30 billion), Louisiana ($18 billion), New Hampshire ($4.26 billion), New Jersey ($41.7 billion), New York ($9 billion), Oklahoma ($10.6 billion), Rhode Island ($4 billion)

The Wall Street Journal, October 7, 2012

Some cities face bankruptcy

– “Harrisburg [PA] is in default on its debt and has been effectively shut out of the municipal-debt market, which cities and states use to finance everything from building schools to paving roads.Harrisburg's misery is familiar to many U.S. cities trying to climb out of debt used to finance convention centers, hotels and employee pensions. Some governments are cut off now from funding for necessities such as repairing infrastructure.” The Wall Street Journal, February 1, 2013

Detroit: The Mother of all Pension Problems

Is New York City Next?

Mayor Michael Bloomberg: NYC may be the next Detroit

New York City is headed toward the same bankrupt fate as Detroit, unless the incoming mayor tends to municipal union issues and

curbs soaring pension costs right away, Mayor Michael Bloomberg warned on Tuesday. “Avoiding the hard choices is how Detroit went

bankrupt,” he said, in a speech before a Brooklyn crowd… he’s advising his followers to take heed from a city that’s been there, done

that, in terms of financial disaster. Chicago, he reminded, just sent pink slips to 2,100 teachers and school workers to help defray the

costs of pensions.

Washington Times, August 8, 2013

Looming Deadlines

Looming Deadlines

February 7, 2014 – Debt Ceiling

March 31, 2014 – Expiration of the “Doc Fix”

October 1, 2014 – Beginning of Fiscal year 2015

November 4, 2014 – Mid Term Elections

December 21, 2014, Tax Extenders

How is Obamacare doing?

Indicators that your employer has changed to Obama’s Health Care Plan

Two Coverage Options:

Above the waist or below the waist

Directions to your doctor’s office include

“Take a left when you enter the trailer park.”

The tongue depressors taste faintly of Fudgesicles

The only item listed under Preventative Care Coverage is “an apple a day”.

Your primary care physician is wearing the pants you gave to Goodwill last month.

“The patient is responsible for 200% of out-of-network charges,” is not a typographical error.

Every one of their approved doctors are incarcerated

And the Number One Sign You’ve Joined Obama’s Health Care Plan:

You receive notice that you are now a part time

employee instead of full time.

On to the 2014 Election

2014 Election: Rothenberg Report

Category Senators

Pure Toss Up Mary Landrieu (D-La)

Tilt Republican Mark Prior (D-Ark.)Max Baucus (D-Mont.) (open)

Tilt Democrat Mark Begich (D-Alaska)Kay Hagen (D-NC)

Lean Republican Mitch McConnell (R-Ky.)Jay Rockefeller (D-W.Va.) (open)

Lean Democrat Tom Harkin (D-Iowa) (open)

Republican Favored Saxby Chambliss (R-Ga.) (open)Tim Johnson (D-S.D.) (open)

Democrat Favored Jeanne Shaheen (D-NH)Carl Levin (D-Mich) (open)

Mark Warner (D-Va)

Rothenberg Report, January 23, 2014

How Popular is Congress?

Gallup:

Congress approval is up to 13%, from 11% in October during the U.S. government shutdown. The disapproval rate of Congress is 82%, down from 85% in October.

- January 5-8, 2014

The Gallup Poll:

June 13, 2013

Compared to Congress, the poll found Respondents prefer:

Witches, 46% to 32%Jury Duty, 73% to 18%Hemorrhoids, 53% to 31%Anthony Weiner, 50% to 23%Vladimir Putin, 49% to 28%Charles Manson, 56% to 18%FRANCE, 46% to 37%Miley Cyrus, 36% to 31%The DMV, 48% to 25%‘Twerking’, 37% to 33%. Source: Public Policy Polling, October 8, 2013

Outlook for Tax Reform in 2013 –

Is More Redistribution Needed?

Sophisticated Discussion on Tax Reform?

The current tax code “is kind of screwy.”

President Barack Obama, April 6, 2011

The Tax Code Has Become More Progressive

Year IncomeClass

% of TotalAGI

% of Total Income Tax Paid

2010 Top 1% 18.9% 37.4%

Bottom 50% 11.7% 2.4%

2007 Top 1% 22.86% 39.81%

Bottom 50% 12.19% 3.36%

2000 Top 1% 20.81% 37.42%

Bottom 50% 12.99% 3.91%

1990 Top 1% 14% 25.13%

Bottom 50% 15.03% 5.81%

1980 Top 1% 8.46% 19.05%

Bottom 50% 17.68% 7.05%

Source: The Tax Foundation, “Summary of Latest Federal Income Tax Data”, November 29, 2012

*Handout: Joint Committee on Taxation “Overview of the Federal Tax System”, February 24, 2012

Taxes to Increase in 2013 for Wealthier Taxpayers

Sources: Joint Committee on Taxation, Estimate Of Federal Tax Expenditures For Fiscal Years 2012-2017, February 1, 2013 White House Office of Management and Budget, January 8, 2013

The White House projects wealthier taxpayers will pay an additional $27 billion in taxes in calendar year 2013 because of the Fiscal Cliff deal. The White House further estimates that high-income taxpayers will pay an additional $88 billion per year by FY2023.

Tax Expenditures benefit more than the “Rich”

Source: Joint Committee on Taxation , Estimate Of Federal Tax Expenditures For Fiscal Years 2012-2017, February 1, 2013

2012 Federal Tax Benefits Total Benefit for Incomes$200,001 and Above

Total Benefit for Incomes$200,000 and Below

Mortgage Interest $23.6 Billion $44.5 Billion

Student Loan Interest $0 $1.3 Billion

Education Credits $65 Million $11.8 Billion

Child Tax Credit $16 Million $56.7 Billion

Earned Income Tax Credit $0 $59 Billion

Child Care Credit $166 Million $3.1 Billion

Charitable Giving $21.6 Billion $16 Billion

Local Taxes (Including Sales) $24.1 Billion $19.6 Billion

Medical $1.4 Billion $10.3 Billion

Real Estate Tax $6 Billion $18.2 Billion

TOTAL $76.9 Billion $240.5 Billion

Tax Rates for California and New York City

StateTop Federal

Tax Rate(inc. 3.8%

Medicare tax)

Top State/Local Tax

Rate

Total Top Income Tax

Rate

California 43.4% 13.3% 56.7%

New York City 43.4% 12.696% 56.096%

Selected Federal Means-Tested Programs and Refundable Tax Credits

Outlay for theFederal Government

1972(2012 Dollars)

1991(2012 Dollars)

2011(2012 Dollars)

Earned Income Tax Credit Amount Spent* % of all Tax Filers

00

$8 Billion7.6%

$55 Billion17.7%

Child Tax Credit Amount Spent* % of all Tax Filers

00

00

$28 Billion14.7%

Supplemental Security Income Amount Spent % of all U.S. Residents

00

$23 Billion1.8%

$49 Billion2.5%

AFDC/TANF Amount Spent % of all U.S. Residents

$18 Billion**

$20 Billion**

$18 Billion**

SNAP (Food Stamps) Amount Spent % of all US Residents

$9 Billion5.3% (11.1 million)



Housing Assistance Amount Spent % of all Households

$5 Billion2.1%

$26 Billion4.1%

$39 Billion3.7%

Pell Grants Amount Spent % of US Residents

00

$8 Billion1.3%

$36 Billion3.0%

Tax Code provisions in RED.*Numbers for tax credits consist only of amounts paid to tax filers because they exceed filers’ tax liabilities.**Comprehensive data on participation are not available for AFDC/TANF.

Source: Congressional Budget Office, “Means-Tested Programs and Tax Credits for Low-Income Households,” February, 2013

Common Theme: Tax Expenditures

Prime Targets

Tax Expenditure for Individuals Estimated Cost (2013 – 2017)

Health Care Exclusion $ 760 billion Home Mortgage Deduction $ 379 billion Reduced Taxes on Investments $ 402 billion Defined Benefit Plans $ 212 billion Earned Income Credit $ 326 billion State and local, Sales Tax,

and Property Tax Deductions $ 278 billion Defined Contribution Plans $ 336 billion Charitable Deductions

(excluding Health and Education) $ 183 billion Medicare – Hospital (Part A) $ 170 billion Social Security/RR Retirement $ 180 billion Cafeteria Plan Exclusion $ 192 billion Inside Buildup $ 158 billion

Joint Committee on Taxation “Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017,” February 1, 2013

Prime Targets

Corporate Tax Expenditures Estimated Cost (2013-2017)

Deferral of active income of controlled foreign corporations $ 265 billion

Exclusion of interest on public purpose State and local government debts $ 191 billion Deduction for income attributable to domestic production activities $ 78

billion Inventory property sales source rule exception $ 18

billion Depreciation of Equipment in excess of alternative depreciation system $ 26 billion Inclusion of income arising from business indebtedness

discharged by the reacquisition of debt instrument $ .3 billion Tax Credit for low-income housing $ 37

billion Expensing of research and experimental expenditures $ 34

billion Inventory methods and valuation: Last in first out $ 27 billion Reduced rates for first $10,000,000 of corporate taxable income $ 19 billion

Joint Committee on Taxation “Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017,” February 1, 2013

Credit Union Tax Exemption

Today, credit unions are largely indistinguishable from banks in how, and with whom, they conduct business, with one crucial exception – banks pay corporate income taxes and credit unions do not.

The most recent JCT tax expenditure analysis estimated that the tax exemption for

credit unions will reduce federal tax revenues by $9.46 billion over fiscal years 2014-2018.

This multi-billion dollar tax subsidy confers a substantial competitive advantage that no longer has any policy or economic justification. All credit unions should pay federal corporate income taxes.

Credit Union Tax Exemption (continued)

As initially conceived, credit unions were small, volunteer-run depository institutions serving members, many of whom had very limited means, with a common bond or affiliation, such as the same employer or church.

Credit unions have moved sharply away from their original mission while growing substantially in size. Some credit unions have implemented schemes that permit anyone at all to bank with them, eliminating supposed membership restrictions.

At the end of 2012, federally insured credit unions had $74.2 billion of undivided earnings

and had record earnings for the year.

In addition, the greatest growth was in the very large credit unions—that is, those that least resembled the very small institutions that were prevalent when Congress first granted credit unions tax-exempt status. As the National Credit Union Administration noted:

“Growth [in 2012] was most robust in credit unions with assets above $250 million. This group of 751 credit unions showed the largest gains in nearly every category, including membership, net worth, market share, loans and assets.”


Any basis for the credit unions’ tax exemption long ago ceased to apply. As noted in a 2005 Tax Foundation study, “Today the principal justification for the tax exemption would seem to be that it already exists.”

There is ample precedent for repealing the tax exempt status of financial services entities when the original justification for that status ceases to exist.

For example, Congress repealed the tax exemption for savings and loans and cooperative and mutual savings banks in 1951, and the tax exemptions for other financial services entities in 1986 and 1997.

Credit unions were first characterized as tax exempt nearly a century ago because of their similarity to savings and loans and cooperative and mutual savings banks, but those other entities have paid income taxes since 1951.

Both Republican and Democratic Administrations have proposed repealing or

curtailing the tax exempt status of credit unions in order to end a disparity that provides credit unions an unjustified competitive advantage, at taxpayer expense.


In 1978, President Carter proposed repealing the tax exempt status of credit unions, stating:

“I am recommending changes that will recognize the contemporary practices of financial institutions and will bring the tax treatment of commercial banks, savings and loan associations and credit unions more in line with the taxation of other businesses…. Credit unions are tax-exempt. Yet, their powers and functions are defined so broadly that the term ‘credit union’ can include financial institutions that are functionally identical to a savings and loan association. The tax exemption provides them with an unfair financial advantage over their competitors.”

In 1986, President Reagan proposed taxing credit unions as part of his plan to reform the tax code. He stated:

“In an economy based on free market principles, the tax system should not provide a competitive advantage for particular commercial enterprises. Credit unions should thus be subject to tax on the same basis as other financial institutions.”


In 1990, the George H.W. Bush Administration proposed repealing the tax exempt status of credit unions with $50 million or more in assets. His Treasury Department explained:

“Because of their tax exemption, credit unions enjoy a competitive advantage over other financial institutions such as commercial banks and savings and loan associations….In an economy based on free market principles, the tax system should not provide a tax subsidy to particular commercial enterprises or a competitive advantage to those enterprises over others that perform substantially the same functions. Although credit unions were founded to extend short-term personal loans to narrowly defined groups, today large credit unions frequently function more as full service consumer banks.”

In 2010, President Obama’s Economic Recovery Advisory Board supported taxing credit unions, stating:

“Unlike other financial institutions like banks and thrifts, credit unions do not pay corporate taxes on their income. This puts them at a competitive advantage relative to other financial institutions for tax reasons. Eliminating this exemption would raise revenue and level the playing field.”

Possible Game Changers

1. Obamacare1. Young people

2. Who actually pays?

3. How mad people get with possible change in service, narrower networks, higher deductibles and copays

4. Relentless news coverage1. Colorado

2. Russian Olympics

3. Domestic Terror Event

4. Natural Disaster

5. World Cup in Brazil

Possible Game Changers (cont’d)

6. Presidential Politics 1. Christie

2. Clinton

3. Biden

4. Jeb Bush

7. Supreme Court decision on recess appointments

8. Supreme Court decision on Illinois/home health workers

9. IRS – 501 (c)(4) Scandal

10. NSA

11. Benghazi

Possible Game Changers (cont’d)

12. Foreign Policy

a. Syria

b. Libya

c. Egypt

d. Israel

e. Iran

f. Afghanistan

g. China – Japan

h. North Korea

13. Immigration Reform

14. War on Income Inequality & Unemployment Benefits

15. New Congressional Scandal

16. Unknown

View from Washington

Documents

Transcript of View from Washington