Tax legislative outlook

Washington Council Ernst & Young

February-March 2012

Page 2

What’s on the horizon?

Longer-term extension of payroll tax cut, UI, doc fix, plus discussion of “tax extenders”

Continued discussion of tax reform: Camp draft, Enzi bill,Obama framework

Consideration of other transportation programs, such as FAA and highway funding

What to do about expiration of Bush tax cuts, budget sequester?

Page 3

Factors driving tax policy changes in the new year

2 201PoliticsShort-term tax

provisionsBush

tax cutsTax reform

Page 4

Election year politics influences legislative landscape

President, Congress already in campaign mode► Fight over payroll tax extension emblematic of difficulty reaching

bipartisan agreement► Obama calling for greater income equality, job creation

► Enjoying spike in polls due to better unemployment numbers

► Budget proposal to partly serve as campaign document, e.g. proposals to require minimum tax rate on multinational companies and millionaires won’t become law but may appeal to voters

Some controversial items may not be resolved until lame-duck session of Congress, after election► Tax extenders► Bush tax cuts► Budget sequester as a result of Super-committee failure

Page 5

Legislative Environment for Energy Policy

► Jobs/ Economic Growth Dwarfs other topics

► Climate Change is No Longer a Policy Driver

► Skepticism regarding Green Jobs claims made by stimulus recipients

► Renewables Under GOP Attack as Proxy for Stimulus, Obama/Pelosi Agenda

Page 6

Post-election session likely to focus on tax issues

► November elections may influence how the parties will address tax issues in lame-duck session

► Allowing tax rates to go up is politically difficult for both sides► Democrats inclined to let rates go up for higher income taxpayers, but

may not be able to achieve that and get extensions for middle and lower income levels

► If attempt to offset costs, parties differ on revenue offsets—spending cuts (Rs) v. tax increases (Ds)

► Congress/Obama may opt not to pay for extensions similar to 2010► Deficit concerns put pressure on paying for bill► Can acceptable offsets of sufficient magnitude be found?

► Compromise could be unpaid for short-term extension with commitment to undertake tax reform in 2013

Page 7

Congressional profile

House

► 87 Republican freshmen in the current Congress, 30 of whom from districts Obama won in 2008

► 20 Democrats have announced they won’t run this year: 12 retiring, 8 running for other office

► 15 Republicans have announced they won’t run this year: 8 retiring, 7 running for other office

Senate

► 9 current senators will not run for re-election (6 Democrats, 2 Republicans, 1 independent)

► 10 Republican seats are up for election in 2012 (Lugar, Brown, Hatch, Heller seen vulnerable)

► 23 Democratic seats are up for election in 2012 (many vulnerable)

242 Republicans 192 DemocratsPlus 1 vacancy : Giffords, D-AZ: Special election June 12

47 Republicans53 Democrats2 independents caucus with Democrats

Page 8

Current and future deficits and federal debt

$1.1 trillionFY2012 deficit Current

policiesExtending Bush tax cuts beyond 2012

Medicare payment rates for physicians’ services

Extending tax extenders beyond 2011

AMT patch

Federal debt, FY2012: $16 trillion

$11 trillionFY2013–2022 deficit under

current POLICIES

Debt projection, 2022: $21.6 trillion

$3.1 trillionFY2013–2022 deficit under current LAW

Spending reductions required by BCA do not take effect

Page 9

Budget deficit projections

Current Law Baseline Deficit $4.7 trillion

$429 billion

$2.2 trillion

$1.9 trillion Index to inflation 2011 parameters of AMT

Extend Medicare `doc fix’

Extend current estate, gift, generation-skipping taxes

$9.7 trillion=

$431 billion

=

+

+

+

2013-2022

Continue 2001 and 2003 tax cuts

Adjusted Baseline Deficit

+

Page 10

Current policies could add trillions to deficit over 10 year period

Extending the Bush tax cuts and AMT patch $5.35 trillion

$1.2 trillion

$372 billion

$1 trillion Extending other tax provisions like tax extenders

Extending Medicare `doc fix’

Rolling back BCA sequester

$7.9 trillion=

$6.7 trillion=

+

+

+Notes: Estimated cost of extension over 10 years, FY2013-2022, including debt service

Source: Congressional Budget Office, CBO Budget and Economic Outlook: Fiscal Years 2012 to 2022, January 31, 2012.

+

Page 11

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

CBO's Current Law Baseline CBO's Alternative Scenario

Perc

ent o

f GDP

CBO's annual deficit projections, fiscal years 2011-2022

Notes: 2011 is actual deficit. CBO’s alternative scenario the current law baseline with the following adjustments: all expiring individual and business tax provisions are extended through 2022, Medicare payments to physicians are not reduced, and the sequestration does not occur as scheduled. The current law baseline and the alternative scenario both assume that the current payroll tax cut expires on Feb. 29, 2012.Source: Congressional Budget Office, CBO Budget and Economic Outlook: Fiscal Years 2012 to 2022, January 31, 2012.

Page 12

Long-run federal spending and revenue projections

Sources: Congressional Budget Office, Long-Run Budget Outlook — Alternative Fiscal Scenario (June 2011); Monthly Treasury Statement (September 2011, for FY 2011 only. Estimates do not take into account Budget Control Act of 2011.

Composition of federal spending as a percent of GDP: 1970 to 2050

1970 1980 1990 2000 2010 2020 2030 2040 20500

5

10

15

20

25

30

35

40

45

50

Discretionary and other mandatory spending

Net interest

Social Security outlays

Medicare, Medicaid, Chip and Exchange Subsidies

Receipts

Perc

ent o

f GD

P

18.0% historical revenue level, 1970–2010

Page 13

Sources and uses of federal revenues, FY2011

Estate and Gift Taxes; 0.3% Excise Taxes, 3.1% Corporation Income

Taxes; 7.9%

Medicare, 8.0%

Other, 5.8%

Social Secu-rity, 27.4%

Individual Income Taxes, 47.4%

Total: $2.3 trillion Total: $3.6 trillionSource: Monthly Treasury Statement (Oct. 2011); OMB Supplemental Materials: Outlays; Medicare Trustees Report 2011Notes: “Other” revenue includes Federal Reserve earnings, customs duties, and other miscellaneous receipts. “Other Entitlement” includes Medicaid, unemployment compensation, housing assistance, food stamps, federal employee and military retirement, and veterans’ benefits. “Non-defense discretionary” includes international affairs, transportation, commerce and housing credit, energy, education, science and technology, natural resources, community and regional development, health, administration of justice, general government and allowances .

Net Interest, 6.3%

De-fens

e; 18.9%

Medicare

; 15.5%

Social Security, 20.3%

Other En-

ti-tle-

ment;

25.2%

Non-de-fens

e dis-cre-tiona

ry, 14.2%

ExpendituresRevenues

Page 14

The economy

Housing market remains weak Unemployment

► Home values have dropped by one-third since 2006 peak

► Inventory of foreclosures continue to put downward pressure on home prices

► Obstacles limiting access to mortgage credit contribute to weakness in housing demand (Fed, 1/12)

► December 2011 unemployment at 8.5%

► Trended downward in 2011► 8.6% in November 2011► 9.1% in August 2011

► CBO predicts will get worse in 2012 (1/12 budget outlook)

► 8.9% for 2012► 9.2% for 2013

Page 15

2012 timeline

► FEB 29 

Expiration of ► Payroll tax relief► Expanded

unemployment benefits► Medicare physicians

payment rate

► JAN 24President deliveredState of the Unionaddress

► NOV 6Election Day

► END OF 2011Tax extenders expired

JAN MARCHFEB APRIL 2013MAY JUNE JULY AUG SEPT OCT NOV DEC2012

► FEB 13Obama FY2013 budget released

► POST-ELECTIONLame-duck

session

► MARCH 31Highway fundingexpires

► 2013Bush tax cuts expire;Sequester with 9-10% cut indiscretionary spending

► SEPT 30

Governmentfunding expireswith end offiscal year

Page 16

Factors driving tax policy changes in the new year

2 201Politics Short-term taxprovisions

Bushtax cuts

Tax reform

Page 17

► Debt limit negotiations► $900 billion debt limit increase agreed

to, at last minute, in exchange for $917 billion in deficit reduction from discretionary spending caps for period from FY 2012-2021

► Deficit reduction offsets for additional debt limit increase delegated to Joint Select Committee (“Super Committee”)

►Super-committee► Bipartisan 12-member panel

announced Nov. 21 it could not reach agreement on $1.2 trillion-plus in deficit reduction

►Payroll tax, other expiring items► Dispute over revenue offsets, etc.

resulted in 2-month extension just before Christmas

2011 marked by partisan gridlock

Page 18

-No tax increases, unless Bush tax cuts are

extended, with reduced rates

-Focus on spending cuts

-Entitlement cuts must be accompanied by tax increases for high

incomes

Republicans Democrats

Gridlock attributable to opposing views on how to achieve deficit reduction

Page 19

Payroll relief, UI, doc fix extended through 2012

Extension through remainder of 2012 (10 months):► Payroll tax relief

► not paid for

► Expanded unemployment benefits► offset by revenue from spectrum auctions and a change to Federal

employee pension contributions

► Medicare ‘doc fix’► paid for with various Medicare-related offsets

► Tax extenders and bonus depreciation not included

Page 20

Tax extenders

Package of 60 business and individual “tax extenders” expired 31 Dec 2011

Efforts to attach extenders to payroll bill were unsuccessful

Precedent exists for the provisions to expire, then be seamlessly extended

Active financing

exception

CFC look-through

R&D credit

Renewable

energy credits

State/local Sales tax deduction

Estimated cost of 1-year extension: $37 billion

NMTC

Page 21

Select corporate tax provisions expired at end of 2011R&D credit

Active financing exception

CFC look-through

100-percent bonus depreciation

Indian employment tax credit

New markets tax credit

Mine rescue team training credit

Employer wage credit for military reservists

Credit for maintaining railroad tracks

Work opportunity tax credit

Qualified zone academy bonds

15-year cost recovery for leaseholds, restaurants

7-year recovery for motorsports complexes

Accelerated depreciation for Indian reservation

Enhanced charitable deduction for food inventory

Enhanced charitable deduction for book inventory

Enhanced charitable deduction for computers

Small business expensing

Election to expense advanced mine safety equipment

Expensing rules for film and television Expensing of “brown fields” remediationDeduction for domestic production activities in

Puerto RicoModification of tax treatment of certain payments

to controlling exempt organizationsBasis adjustment to stock of S corporations

making charitable contributions of propertyReduction in S corporation recognition period for

built-in gains taxTreatment of certain dividends of regulated

investment companies (“RICs”)RIC qualified investment entity treatment under

FIRPTARum excise taxAmerican Samoa economic development credit

 

Page 22

Energy provisions expired at end of 2011

► Credit for certain non-business energy property► Conversion credit for plug-in electric vehicles► Alternative fuel vehicle refueling property► Incentives for alcohol fuels► Incentives for biodiesel and renewable diesel► Coal production credit► Credit for construction of new energy efficient

homes ► Credit for energy efficient appliances ► Grants for specified energy property in lieu of tax

credits ► Suspension of percentage depletion for oil and

gas from marginal wells► Incentives for alternative fuel and alternative fuel

mixtures

Page 23

Energy provisions expiring at end of 2012

► Cellulosic biofuel producer credit► Place-in-service date for wind

facilities to claim electricity production credit

► Election to claim the energy credit in lieu of the electricity production credit for wind facilities

► Special depreciation allowance for cellulosic biofuel plant property

Page 24

Energy Extenders: What’s stopping them?

► Cost of Entire Extender Package: Over $30 Billion/ year

► Inability to agree on whether/how to offset the cost

► Controversial Items: Ethanol blenders credit, Treasury section 1603 Grants

► House and Senate Tax Writers Vow to Delay Extension until package “scrubbed” of outdated provisions

Page 25

What’s new in the Obama FY2013 budget?

Dividends to be taxed as ordinary income for incomes over $250,000► Previous budgets set 20%

top rate► 20% top rate still

proposed for capital gains► Would raise/save $206

billion/10 years

Buffett Rule proposed to replace alternative minimum tax► “Buffett Rule” to require

30% minimum tax on annual incomes over $1 million

Insourcing/outsourcing proposals► Eliminate deduction for

moving operations overseas, new credit to relocate back to U.S.

► Tax credit for investments in distressed areas

► Double 199 deduction for advanced manufacturing

New int’l proposals► Tax gain from the sale of a

partnership interest on a look-through basis

► Extend Sec. 338(h)(16) to certain asset acquisitions

► Remove foreign taxes from a Sec. 902 corporations foreign tax pool when earnings eliminated

► Prevent leveraged distributions from related foreign corporations to avoid dividend treatment

Page 26

FY2013 budget revenue-raising proposals

► Repeal preferences for oil and gas industry► Repeal preferences for coal industry► Reinstate Superfund excise taxes► Reinstate Superfund environmental income tax

$36.3 billion$4.4 billion$6.5 billion$12.9 billion

Energy

► Restore 2009 parameters► Require consistent valuation for transfer and income tax purposes► Modify rules on valuation discounts► Require a minimum term for grantor-retained annuity trusts► Limit duration of generation-skipping transfer tax rules applicable to grantor trusts► Coordinate certain income and transfer tax rules applicable to grantor trusts► Extend the lien on estate tax deferrals provided under Section 6186

$119 billion$2 billion$18 billion$3.3 billionNegligible$910 million$160 million

Estate and gift

► Impose financial crisis responsibility fee► Require accrual of income on forward sale of corporate stock► Require ordinary treatment of income from day-to-day dealer activities► Modify definition of “control” for purposes of Section 249

$61.3 billion$303 million$192 million$12.9 billion

Financial institutions

► Modify rules that apply to sale of life insurance contracts► Modify proration rules for life insurance company general and separate accounts► Expand pro rata interest allowance for COLI

$811 million$7.7 billion$7.3 billion

Insurance Source: OMB FY2013 Budget

Page 27

Democrats

- X % surtax on income over $1 million

- Corporate tax loophole closers (proposal likely to emerge week of Feb. 6)

Revenue offsets that were in play for payroll-plus package

Both Parties- Increased GSE

guarantee fees (financed 2-month bill)

- Means testing for unemployment benefits, food stamps

- Revenue from drawing down forces in Iraq and Afghanistan?

Republicans

- Federal civilian workforce pay freeze

- changing the co-pay structure for civilian federal retirees

- spectrum auctions

- flood insurance reform

- ensuring illegal immigrants who are not eligible to work in the US do not get IRS checks

- requiring SSN to collect child tax credit

Page 28

Factors driving tax policy changes in the new year

2 201Politics Short-term taxprovisions

Bushtax cuts

Tax reform

Page 29

Major year-end tax changes if Congress does not intervene

► Expiration of the 2001/2003 tax relief at the end of 2012► Highest marginal income tax rates will rise to 36% and 39.6% from

33% and 35%, respectively.► 10% rate bracket will be eliminated.► Maximum rate on qualified dividends will rise from 15% to 39.6%.► Maximum rate on long-term capital gains will rise from 15% to

20%.► Phaseouts of itemized deductions and personal exemptions will be

reinstated for high-income individuals.► Marriage penalty relief will expire.► Child tax credit will decline from $1,000 to $500.► Maximum estate tax rate will rise from 35% to 55% and exemption

will fall from $5 million to $1 million.

Page 30

Scheduled 2013 individual tax rates

Description Current rates Scheduled rates for 2013 Other additions

Individual income tax rates

10%; 25%; 28%; 33%; 35%

15%; 28%; 31%; 36%; 39.6%

Reinstate personal exemption phase-out (PEP) and Pease limitation on itemized deductions

Individuals with income over $250,000 (joint) or $200,000 (individual) face tax increases of:

► 0.9% on wages (on amounts exceeding threshold) and

► 3.8% on investment income (e.g., interest, dividends, capital gains) if AGI exceeds threshold

Qualified dividends 0%; 15% Individual income tax rate, with top rate of 39.6%

Long-term capital gains

0%; 15% 20%

Estate tax 35% top rate; $5 million exemption

55% top rate; $1 million exemption

Page 31

Political perspectives on expiring Bush tax cuts

Allowing tax rates to go up is politically difficult

Congress could opt not to pay for bill like 2010

Fundamental reform could avoid fights over expiring tax rates and provisions, though coming to agreement on reform will be difficult

2

3

4

5

1

Parties differ on revenue offsets—spending v. tax

6

5 Deficit concerns put pressure on paying for bill

Democrats want to let cuts expire for high incomes

Page 32

Factors driving tax policy changes in the new year

2 201PoliticsShort-term tax

provisionsBush

tax cutsTax reform

Page 33

Major drivers of tax reform

► The United States has among the highest corporate tax rates and is among the few nations with a worldwide system of taxing foreign earnings► Economists believe this hampers the

competitiveness of US firms► The system is complex, largely due to the

temporary nature of many tax provisions► Desire to `clean out junk’ in Code

► Uncertainty of provisions, including Bush tax cuts

Page 34

Corporate tax rates in the OECD, 2011

Note: Includes both national and sub-national statutory corporate tax rates. Source: OECD, IMF

Percent

0

5

10

15

20

25

30

35

40

45

GDP-weighted Average (excluding US) – 29.9%

Simple Average (excluding US) – 25.1%

Page 35

This year in tax reform

What happened in 2011? What do we expect in 2012?► Loose consensus about

broadening the tax base (i.e., removing many provisions) to lower tax rates

► 2010 Bowles-Simpson panel backed this approach

► Several hearings in Ways & Means, Senate Finance

► Chairman Camp discussion draft► 25% rate envisioned, territorial

system outlined► Treasury White Paper on

corporate reform was expected but not released

► Wyden-Coats

Obama tax reform plan coming in February► Wants Congress to act on insourcing

reforms immediately

Camp draft ► Further meetings with stakeholders► More hearings expected► Version 2.0?

Sen. Portman plan expected by spring► Comprehensive plan to achieve 25%

rate expected

Senate Finance Committee► Chairman Baucus could release tax

reform draft of his own► More hearings expected

Page 36

The President’s Framework for Business Tax ReformCut provisions to cut corp. rate► 28% corporate rate► No comprehensive list of

provisions to be cut, but a few are highlighted:

► LIFO, oil/gas, carried interest, jet depreciation

► Depreciation, deductibility of interest expense should also be considered

Manufacturing Incentives► Cut effective rate for

manufacturers to 25% by refocusing Sec. 199 manufacturing deduction

► Increased to 10.7%► Permanent R&D credit► Energy incentives

International tax► Appears to call for

retention of the worldwide system of taxing foreign earnings

► Comes out against pure territorial system

► US-based companies to pay an unspecified minimum tax on foreign earnings

Small business ► Make tax filing simpler► Allow expensing up to $1 million in

investments ► Allow cash accounting on businesses

with up to $10 million in gross receipts

Fiscal responsibility► Plan is revenue neutral, but $250 billion

required to make permanent temporary provisions that are routinely extended,

► Temporary provisions must be paid for or eliminated

Page 37

The President’s Framework for Business Tax Reform► Cut Provisions, Broaden Base, Cut Corporate Tax Rate

► Rate lowered to 28%► No comprehensive list of provisions to be cut, but some highlighted

► eliminating “last in first out” (LIFO) accounting ► eliminating oil and gas tax preferences ► reforming treatment of the insurance industry and products ► taxing carried (profits) interests as ordinary income► eliminating special depreciation rules for corp. purchases of aircraft

► Other changes should be considered: elimination of depreciation schedules limiting deductibility of interest expense

► Strengthen American Manufacturing and Innovation► Cut effective rate for manufacturers to 25% by increasing Sec. 199

manufacturing deduction to 10.7%► Make permanent R&D credit, energy tax incentives

Page 38

The President’s Framework for Business Tax Reform (continued)► Strengthen the International Tax System

► Appears to call for retaining worldwide system for foreign earnings► Comes out against pure territorial system

► US-based companies to pay unspecified minimum tax on foreign earnings

► Simplify and Cut Taxes for America’s Small Businesses ► Make tax filing simpler► Allow expensing up to $1 million in investments ► Cash accounting on businesses with up to $10 million in gross

receipts

► Restore Fiscal Responsibility ► Plan is revenue neutral, but $250 billion required to make

permanent temporary provisions that are routinely extended ► Temporary provisions must be paid for or eliminated

Page 39

President’s Framework for Business Tax Reform Energy-Related Provisions

The President’s “Framework for Business Tax Reform” was released on February 22nd. It would eliminate “dozens of tax loopholes and subsidies” and reform the business tax base to reduce the corporate tax rate from 35% to 28% (with a 25% rate on manufacturing income). Most tax expenditures for specific industries would be eliminated, with only a few exceptions “that are critical to broader growth or fairness.”The Framework would repeal all tax preferences for fossil fuels, including expensing of intangible drilling costs and percentage depletion for oil and natural gas wells.

President’s Framework Retains Incentives for Clean Energy. ► Unlike the approaches to fundamental tax reform offered by the

Republican Presidential candidates, the President’s Framework retains “key incentives to encourage investment in clean energy.” For example, the Framework would make permanent the “tax credit for the production of renewable electricity, in order to provide a strong, consistent incentive to encourage investments in renewable energy technologies like wind and solar.” The Framework would make the production tax credit refundable.

Page 40

Broad interest in restricting tax expenditures to lower rates

“”What I'd like to see is — and we're working on a structure to do that — is how low can we get rates? And that means where is the political consensus on how many — and you can call it tax provision, or loophole or expenditure, whatever you want to describe it as — how many of those can we change so we have a more constant effective rate? We also need to move, I think, to a territorial tax system so that we can compete around the world.” – House Ways and Means Committee Chairman Dave Camp (R-MI), June 21, 2011.

“Just lowering the rate only and eliminating a lot of tax expenditures is not going to provide enough revenue to get the rates down to a low enough level to make a difference that most people are looking for. So we are going to have to maybe look at pass-throughs and say they have got to be treated as corporations if they earn above a certain income.” – Senate Finance Committee Chairman Baucus (D-MT), May 4, 2011.

“Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it.” – President Obama, Jan. 24, 2012.

Page 41

Obama framework out week of Feb. 20

• Geithner says effort to allow lawmakers to capitalize on the common ground that has already emerged in Congress on corporate reform

More specific than principles, but not as detailed as legislative

language

• Will preserve a limited number of tax preferences aimed at improving incentives for designing, creating and building in the United States

Calls for broad reform that will lower rates,

broaden the base and eliminate “dozens of

special tax preferences for businesses.”

Page 42

► A base-broadening effort could disadvantage certain industries, favor others► Likely losers: manufacturers ► Likely winners: financial companies, retailers, transportation

► Base-erosion provisions like those in Camp discussion draft could cost companies billions of dollars

► What to do about pass-through entities?► Many, particularly Republicans, feel individual reform should accompany

corporate reform to avoid disadvantaging pass-throughs► Others see changing pass-through taxation as a revenue source

► Obama administration► Senate Finance Committee Chairman Baucus

► Will ‘reform’ get bogged down by tax fairness argument?

Political difficulties of reform proposals

Page 43

JCT memo on reducing corporate rate

• Thus, reducing the statutory corporate rate from 35% to 25% requires “base broadening” of up to $1.2 trillion/10 years

Roughly, a 1%-point reduction in the US corporate tax rate costs $100 billion-

$110 billion/10 years

• $650 billion derived from repealing expenditures for manufacturers: accelerated depreciation and domestic production activities deduction

October 2011 JCT Memo to Rep. Levin:

reduction in corporate tax rate to

28% estimated to cost $717 billion/10 years

Page 44

OMB Largest Tax Expenditures, Fiscal Year 2013

Capital gains on home salesStep-up basis capital gains at death

Exclusion of interest on life insurance savingsSocial Security

Acclerated depreciationState and local bond exclusion

Charitable deductionDeferral

State and local tax deductionRental income exclusion

Employer plansCapital gains

401(k)-type plansMortgage interest deduction

Employer-provided health exclusion

$0 $20

$40

$60

$80

$100

$120

$140

$160

$180

$200

$ billionsSource: Analytical Perspectives FY2013

Page 45

Highlights of JCT estimates on repeal of corporate tax expenditures– memo to Cong. Levin (D-MI) 27 Oct.Provision to be repealed $raised/10 years*

Repeal MACRS/apply ADS $507 billion

Expensing of R&D expenditures $152 billion

Domestic production activities deduction $127 billion

LIFO $63 billion

Low-income housing tax credit $33 billion

Deferral of gain on like-kind exchanges $16 billion

Completed contract rules method $14 billion

Percentage depletion for oil and natural gas wells/coal $10 billion

Exclusion of interest on private activity bonds $9 billion

* Portion of revenue attributable to C corps

Page 46

Highlights of JCT estimates on repeal of corporate tax expenditures (cont.)Provision to be repealed $raised/10 years*

Repeal MACRS/apply ADS $724 billion

Domestic production activities deduction $164 billion

Expensing of R&D expenditures $160 billion

LIFO $70 billion

Low-income housing tax credit $35 billion

Deferral of gain on like-kind exchanges $18 billion

Completed contract rules method $14 billion

Percentage depletion for oil and natural gas wells $11 billion

Exclusion of interest on private activity bonds $9 billion

* Portion of revenue attributable to C corps AND pass-through entities

Page 47

Key elements of recent tax reform proposals

Camp Discussion Draft

Fiscal Commission report

Bipartisan Policy Center (Domenici-

Rivlin) plan

Rep. Ryan’s Road Map for America’s Future

(2010)

Corporate tax rate 25% 28% 27%

Corporate income tax replaced with 8.5%

subtraction-method VAT

Corporate tax expenditures Unspecified Eliminated Many eliminated

Research credit

Unspecified RepealedRepealed; retains expensing for R&D

expenditures

International taxation

Territorial—95% exemption, thin

capitalization rules and anti-abuse provisions.

Territorial system, current taxation of

passive foreign income retained

Retains deferral and worldwide system with

FTC

Individual tax changes Unspecified

Individual tax brackets: 12%, 22%, 28%. Capital gains

and dividends taxed as ordinary income

Individual tax brackets: 15%, 27%. Capital

gains and dividends taxed as ordinary

income

Individual tax brackets: 10%, 25%. Zero tax

rate for interest, capital gains and dividends

Page 48

Potential tax reform winners/losers under Fiscal Commission’s Proposal

Repeal of special industry tax rules

Repeal of accelerated depreciation

Corporate rate reduction

Repeal of Sec. 199 deduction for domestic production

Move to territorial international tax system

DriversWinners

Retail (MNC, domestic)

Wholesale (MNC, domestic)

Transportation (MNC, domestic)

Information (MNC, domestic)

Finance and insurance (domestic)

Services (MNC, large domestic)

Losers

Renewable energy

Utilities (MNC only)

Mining & agriculture

Real estate (MNC, domestic)

Manufacturing (MNC, domestic)

Services (small domestic only)

Analysis uses a 28% corporate tax rate and is based on broad description of territorial tax regime (and assumes adoption of some international base broadeners); analysis could be altered depending on exact shape of territorial regime.*Fiscal Commission’s tax reform proposal was released in December 2010.

Page 49

Energy & Energy Tax – Longer Term

► Electricity and Liquid Fuels rules to be harmonized as electricity becomes a transportation fuel

► Technology neutrality to harness environmental performance and energy density to allocate incentives

► Federal statutes may need adjustment to reflect fact that commercial aviation & military becoming strong markets for biofuels;

► Bipartisan push to wean renewables off of permanent incentives

Page 50

Where do we go from here?

► Short Term:► Retroactively extend current tax incentives in first available vehicle

► Medium Term:► Reform renewable energy tax incentives

► Long Term:► Play role in assembling new tax code during debate on the Tax

Reform Act of 2014