Tax policy update. Jeff Kummer. December 17, 2018

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1 Tax policy update Jeff Kummer December 17, 2018

2 Election 2018 a few initial observations Democrats win control the House Senate and House Democrats may have different views towards compromise during the lame duck session Republicans retain control of the Senate Nancy Pelosi expected to win House speakership albeit after some internal disagreements among different democratic member constituencies Mitch McConnell to remain Senate Majority Leader likely continued emphasis on judicial nominations President Trump will confront a divided Congress with its own agenda(s) and political dynamics The 2020 race for the White House can now officially begin Copyright 2018 Deloitte Development LLC. All rights reserved. 2

4 2017 Tax Reconciliation Act Observations Tax Reform Act of 1986 Public Law Overall Budget Impact Distributional Impact Breadth of Political Support Revenue-neutral over budget window Distributionally neutral over budget window Broad Final Passage: in Senate; in House Net loss of $1.46 trillion over budget window Variation in distribution at all income levels, changing markedly over budget window (due largely to sunsets) Narrow Zero Democratic support at any stage of process Date of Introduction December 3, 1985 November 2, 2017 Date of Enactment October 22, 1986 December 22, 2017 Release of JCT Bluebook May 15, 1987?? Copyright 2018 Deloitte Development LLC. All rights reserved Greater Washington Area Tax Symposium 4

The lame duck session agenda -- Closing out the 115 th Congress Must-do items Funding for the departments of State, Homeland Security, Commerce, Justice, Agriculture, Transportation,

votes on some of the 154 nominees awaiting confirmation, incl.

5 The lame duck session agenda -- Closing out the 115 th Congress Must-do items Funding for the departments of State, Homeland Security, Commerce, Justice, Agriculture, Transportation, Interior, and HUD, as well as the IRS and EPA (expires 12/7) President Trump may veto a spending bill that fails to significantly fund a southern border wall Likely items Farm bill Senate votes on some of the 154 nominees awaiting confirmation, incl. IRS Chief Counsel Intelligence authorization bill Possible items Tax technical correction to TCJA likely to be narrow Tax extenders (TCJA orphans) IRS reform bill Hurricane relief Move to biennial budgeting (but keep annual appropriations) Retirement savings bill Copyright 2018 Deloitte Development LLC. All rights reserved. 5

6 Still waiting on technical corrections Technical corrections Signed-off on by chair and ranking member of Finance and W&M, as well as JCT and Treasury (a high hurdle this year) No budget impact, so cannot move under filibuster-proof budget reconciliation process (need 60 votes in Senate) Reflect intent of drafters, so CBO/JCT generally assign no budget impact By precedent are technical and/or conforming in nature (i.e., non-substantive) Copyright 2018 Deloitte Development LLC. All rights reserved. 6

7 About those tax extenders BBA of 2018 renewed most for 2017 Was it the final straw? The Bipartisan Budget Act of 2018 renewed for 1 year (tax year 2017) most provisions last extended for 2 years (tax years 2015/2016) as part of the PATH Act of W&M Chairman Brady and the House GOP as a whole are generally less supportive of further extending tax reform orphans than the Senate GOP. Some current extender bills sponsored by Republican senators: S.122 (Heller, R-NV): extend exclusion from income for discharged debt on principal residence S.407 (Crapo, R-ID): make permanent the railroad track maintenance credit S.2012 (Hoeven, R-ND): make permanent Indian employment credit and accelerated depreciation for business property on Indian reservations S.525 (Boozman, R-AR): make permanent reduced rate on C corp. timber gains S.944 (Grassley, R-IA): extend credits for biodiesel, renewable diesel used as fuel, and biodiesel mixtures S.975 (Daines, R-MT): make permanent credit for Indian coal facilities S.1469 (Blunt, R-MO): make permanent expensing rules for film, TV, and theatre productions Majority Leader McConnell, R-KY, is a known supporter of 3-year cost recovery for racehorses Copyright 2018 Deloitte Development LLC. All rights reserved. 7

8 Retirement, IRS restructuring and innovation Family Savings Act (H.R. 6757) Allows unrelated businesses to form pooled retirement plans (so-called open multiple employer plans) Relaxes RMD rules for low-balance accounts; eliminate maximum age for traditional IRA contributions Creates Universal Savings Accounts : Non-deductible (up to $2,500/yr), tax-deferred earnings, and no withdrawal restrictions American Innovation Act (H.R. 6756) Reforms and increases the deduction for start-up costs under Sec. 195 Exempts start-up loss and credit carryforwards from limitation under Secs. 382/383 in cases of ownership change IRS Restructuring (various bills) Strengthen taxpayer rights during appeals process Expanded use of electronic filing/signatures and payment of taxes by debit/credit cards Limit IRS authority to seize property due to suspected structuring of financial transactions Reinstate IRS authority to regulate paid tax return preparers Streamline S corp. election procedures Copyright 2018 Deloitte Development LLC. All rights reserved. 8

9 What is likely not happening in the lame duck session? Permanent extension of 2017 Tax Act s temporary provisions (H.R. 6760) Permanently extends TCJA s (lower) individual rate structure, increased standard deduction, repealed personal exemptions, increased AMT exemption and phase-out threshold, and increased estate and gift tax exemption Permanently extends TCJA s itemized deduction changes, including the $10K annual cap on SALT payments, reduced acquisition debt limit of $750K for the mortgage interest deduction, increased percentage of AGI limit for charitable contributions of cash, repeal of misc. itemized deductions, and repeal of the so-called Pease limitation Permanently extends the 20% deduction on the qualified business income of certain passthrough entities under Sec. 199A Cost of permanent extension not offset in the bill CBO estimated cost = $650bn over 10 years JCT macroeconomic dynamic cost = $545bn over 10 years 10 percent middle class tax cut Repeal and/or replacement of the Affordable Care Act Copyright 2018 Deloitte Development LLC. All rights reserved. 9

10 Squeezing a $2 trillion tax cut into a $1.5 trillion box? Many are dubious that limited provisions will actually sunset Cost to extend 2017 Tax Reconciliation Act s expiring provisions Individual rates/brackets Higher standard deduction Higher child tax credit & non-child dependent credit Higher AMT exemptions/phaseout % deduction for passthrough income, with anti-abuse rule Immediate write-off for capital investment Lower floor for medical expense deduction New credit for paid family/medical leave Changes to tax rules for beer, wine, & distilled spirits companies Higher estate & gift tax exemptions SALT & mortgage deduction limitations, Pease limitation suspension, and suspension of certain misc. deductions Repeal of personal exemption Source: Joint Committee on Taxation estimate, Jan. 23, 2018 Additional cost within budget window ($ billion) Copyright 2018 Deloitte Development LLC. All rights reserved. 10

11 Tax law implementation a challenge? Agency finally gets slight budget boost but still faces hurdles Congress cut IRS funding 20% on an inflation-adjusted basis beginning in 2010, to $11.2B in FY2017, but Republicans recently supported a funding increase, to ensure more resources for implementing the 2017 tax overhaul The IRS will get about $11.4B in FY2018 funding, up $196M from last year, with increases targeted at improving customer service, fraud prevention, and cybersecurity The IRS is authorized to spend $320M available until Sept. 30, 2019 on taxpayer services, enforcement, and operations support related to implementation of last year s tax law. However, the Commissioner must submit a spending plan to Congress before the funds will be unlocked $ billion IRS funding, inflation adjusted 9 8 Sources: FY2010-FY2017 figures from Center on Budget & Policy Priorities (CBPP) calculations, based on data from the Congressional Budget Office, the Office of Management & Budget, and the Bureau of Labor Statistics; FY2018 figure from FY2018 Consolidated Appropriations Act The agency has lost the equivalent of about 18k full-time positions since 2010, including about 3k in the taxpayer services division and 4k in the enforcement division As in other parts of the government, the IRS workforce now skews older, with 40% of employees reaching retirement age in the next couple years and few employees under age 25 Copyright 2018 Deloitte Development LLC. All rights reserved. 11

13 CBO projects deficits to climb over the next decade 25% 24% 23% 22% $10.1 trillion deficit ( ) [CBO 2017] $12.4 trillion deficit ( ) [CBO 2018] Current law spending % of GDP 21% 20% 19% 18% Current law revenue 17% 16% Note: All figures reflect current law at the time of formulation (e.g., remaining tax extenders expire as scheduled, sequester cuts are allowed to transpire as scheduled, etc.). Sources: Congressional Budget Office, An Update to the Budget and Economic Outlook: 2017 to 2027 (June 2017) and The Budget and Economic Outlook: 2018 to 2028 (April 2018) Copyright 2018 Deloitte Development LLC. All rights reserved Greater Washington Area Tax Symposium 13

14 But wait there s more Continuing current policy could exacerbate the fiscal imbalance $ billions Total Current law deficits Extend TCJA individual provisions Extend 100% depreciation Make extenders permanent Repeal certain ACA taxes* Inflation-adjust appropriations after 2018** Add associated debt service Current policy deficits 981 1,008 1,123 1,276 1,273 1,244 1,352 1,320 1,316 1,526 12, [1] [1] ,696 [1] ,137 1,308 1,499 1,533 1,537 1,680 1,774 1,952 2,215 15,629 [1] less than $50 million * Assumes repeal of the health insurer fee, the medical device excise tax, and the so-called Cadillac tax taxes Congress has acted to postpone in the past ** Assumes appropriations spending is not allowed to fall to sequester levels in FY2020 but is instead inflation-adjusted from this year s level set by the Bipartisan Budget Act of 2018 Source: Congressional Budget Office, The Budget and Economic Outlook: 2018 to 2028 (April 2018); Joint Committee on Taxation publication JCX-71-18, Sept. 12, 2018 Copyright 2018 Deloitte Development LLC. All rights reserved. 14

15 Automatic spending has taken over the budget (projected) 34% 32% 23% 66% 68% 77% Mandatory spending + net interest Discretionary spending Source: Congressional Budget Office Copyright 2018 Deloitte Development LLC. All rights reserved. 15

5 Projected Cut in Scheduled Benefits Upon Trust Fund Exhaustion 14 12 Social Security (combined OASDI) Medicare (HI) 10 8 21%

16 S The long-term spending challenge is mainly on the mandatory side Solution to revenue-spending mismatch will come to a head, eventually Covered Workers per SS/DI Beneficiary 16.5 Projected Cut in Scheduled Benefits Upon Trust Fund Exhaustion Social Security (combined OASDI) Medicare (HI) % in % in ources: The 2018 annual reports of the Boards of Trustees of the OASDI and Medicare trust funds Copyright 2018 Deloitte Development LLC. All rights reserved. 16

17 The direction of future US tax reform? How other countries collect their revenue % of GDP 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Makeup of taxes as % of GDP within the OECD, 2015 Personal income tax Corporate income tax Social Security contributions Property taxes Goods & Services taxes Other * unweighted Source: OECD, Revenue Statistics: , published Nov. 23, 2017 Copyright 2018 Deloitte Development LLC. All rights reserved. 17

18 Deficit reduction fades as a priority But partisans view of the issue may be influenced by who is in the White House % who say reducing the deficit is a top policy priority 90% 80% 70% 60% 50% 41% All Republicans Democrats 61% 60% 84% 49% 59% 40% 48% 41% 30% 20% 27% Source: Pew Research Center Copyright 2018 Deloitte Development LLC. All rights reserved. 18

20 Out with the old, in with the new Changes coming to Congressional tax leadership Majority Leader Finance Chair Speaker Ways & Means Chair Copyright 2018 Deloitte Development LLC. All rights reserved. 20

21 How might the legislative landscape change next year? With Democrats winning the House, President Trump s personal tax returns could be scrutinized by Ways & Means and made public Will President Trump try to make deals with Democrats on issues of overlapping interest (trade, prescription drug pricing, infrastructure)? Or are we in for two years of gridlock? The subpoena printer is going to need more toner cartridges as oversight hearings and investigations of the Trump administration begin Debt limit needs to be raised in 2019 could be especially challenging with a divided government Reshaping the judiciary to continue in the Senate next year, even if most other legislation grinds to a halt Copyright 2018 Deloitte Development LLC. All rights reserved. 21

22 Reading the tea leaves What might Democrats change about TCJA if they could? Key Democratic amendments rejected during House passage of Tax Reform 2.0 Repeal $10k cap on SALT deduction Expand earned income, adoption, child and dependent tax credits paid for by returning top individual rate from 37% to 39.6% Raise tax rate on repatriated corporate earnings unless families receive $4k tax savings Make permanent lower floor for medical expense deduction paid for by raising corporate rate Senate Democrats March 2018 proposal Return top individual tax rate from 37% to 39.6% Raise corporate tax rate from 21% to 25% Revert to lower 2017 exemptions for individual Alternative Minimum Tax (AMT) Revert to lower 2017 exemptions for estate tax End beneficial tax treatment of carried interest These tax increases would raise about $1T (JCT preliminary estimate), which Democrats say they would use to fund investments in infrastructure Copyright 2018 Deloitte Development LLC. All rights reserved. 22

2020 Senate map: A very different situation from 2018 21 Republicans 11 Democrats 1 Undetermined

24 Who might jump in to the 2020 race? Raise your hand if your name is not on this list Politicians Congress Sen. Cory Booker Sen. Sherrod Brown Sen. Bob Casey Sen. Kirsten Gillibrand Sen. Kamala Harris Sen. Tim Kaine Sen. Amy Klobuchar Sen. Jeff Merkley Sen. Bernie Sanders Sen. Brian Schatz Sen. Elizabeth Warren Rep. John Delaney Rep. Tulsi Gabbard Rep. Seth Moulton Rep. Beto O Rourke Rep. Tim Ryan Rep. Eric Swalwell State/Local Gov. Steve Bullock Gov. Andrew Cuomo Gov. John Hickenlooper Gov. Jay Inslee Mayor Pete Buttigieg Mayor Bill DeBlasio Mayor Eric Garcetti State Sen. Richard Ojeda Former VP Joe Biden Sen./Sec. of State Hillary Clinton Sen./Sec. of State John Kerry Sec. of HUD Julian Castro AG Eric Holder Gov. Terry McAuliffe Gov. Martin O Malley Gov. Deval Patrick Mayor Mitch Landrieu Independently Wealthy Michael Bloomberg Bob Iger Howard Schultz Tom Steyer Mark Zuckerberg Star Power Oscar De La Hoya Dwayne The Rock Johnson Akon Michelle Obama Marianne Williamson Oprah Winfrey Copyright 2018 Deloitte Development LLC. All rights reserved. 24

25 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the Deloitte name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see to learn more about our global network of member firms. Copyright 2018 Deloitte Development LLC. All rights reserved.

455 Democratic likely caucusgoers 1,838 active registered voter contacts. Percentages may not add to 100% due to rounding.

455 Democratic likely caucusgoers 1,838 active registered voter contacts. Percentages may not add to 100% due to rounding. CNN/DES MOINES REGISTER/MEDIACOM IOWA POLL SELZER & COMPANY Study #2182 December 10-13, 2018 450 Registered Republicans 503 registered Republican contacts Margin of error: ±4.6 percentage points weighted