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AGC Financial Issues Forum January 2014. Brian J. Lenihan Director, Tax, Fiscal Affairs, and Accounting Associated General Contractors of America 202.547.4733 | [email protected] AGC Financial Issues Forum Winter Meeting. Federal Tax Update for 2014. Timeline. Players. Content. Strategy.

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AGC Financial Issues Forum January 2014

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Agc financial issues forum january 2014

AGC Financial Issues ForumJanuary 2014

Brian J. Lenihan

Director, Tax, Fiscal Affairs, and Accounting

Associated General Contractors of America

[email protected]


Agc financial issues forum january 2014

AGC Financial Issues Forum Winter Meeting

Federal Tax Update for 2014

Timeline

Players

Content

Strategy

Politics

Outlook


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AGC Financial Issues Forum Winter Meeting

Timeline for Reform


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Summary to Date

  • Unusual bipartisan and bicameral cooperation from lead tax-writers to drive the debate, including joint hearings and a redolent tax reform road show

  • Ways and Means Chairman created bipartisan working groups, released three detailed discussion drafts, and now holding intensive Member-only meetings to prep for rollout

  • Finance Chairman published policy papers in the Spring under a blank slate approach

  • Finance Chairman released four “staff discussion drafts” in the late Fall

  • In December, Chairman Camp announced that he would delay his long-stated goal of marking up a tax bill in 2013

  • Administration has not engaged other than to promote corporate only proposals

  • White House selected Baucus as ambassador to China (confirmation in early 2014)


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2013 Timeline

Source: Bloomberg


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Tax ReformMomentum in 2013

Senate Finance Cmte. shifts focus to IRS scandal

House Ways and Means Cmte. Chairman Dave Camp (R-Mich.) flirts with but decides against Senate run

Corporate coalitions form to advocate for tax code overhaul

Sequester diverts

lawmakers’ attention

Congressional momentum on tax reform

Senators asked to submit confidential proposals on which tax breaks to keep

Congress resumes; budget is top priority

Fiscal cliff deal meets some Democrats’ aim of raising taxes on wealthy; eases widespread push for reform

Senate Finance Cmte. Chairman Sen. Max Baucus (D-Mont.) announces retirement

Source: National Journal


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Key Dates in 2014

  • The transition of Finance Chairman could begin as early as January

  • W&M Chairman Camp could release a comprehensive draft bill in January - February

  • Debt Limit February – March (CBO June)

  • Primary season starts March – May – kitchen table issues will shift to forefront

  • The majority of primaries will occur in June & August

February

March

May

January


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Congressional Agenda

  • Highway Reauthorization

  • Unemployment Insurance

  • Minimum Wage

  • Health Care Reform/Repeal

  • Farm Bill

  • Water Infrastructure (WRRDA)

  • NSA

  • Immigration Reform

  • Flood Insurance Program

  • Higher Education

  • Pension Reform

  • Housing Finance Reform

  • Terrorism Risk Insurance

  • Repeal of Medical Device Tax

  • Physician Reimbursement (SGR)

  • Trade agenda


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Key Decision Makers


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Key Players

Ron Wyden(D-Ore.)

Elected: 1996; 4th term

Dave Camp (R-Mich.)

Elected: 1998; 8th term

Profile: Promoted health care legislation with Chairman Paul Ryan (R-WI)

Sponsored a tax reform bill with Sen. Dan Coats (R-IN)

Pitched transportation legislation with Sen. John Hoeven (R-ND)

Motivation: Term limited as Chairman and sees as legacy agenda item

Next Step: Vie for Tax Subcommittee Gavel or run for leadership position – opted out of run to succeed the open Senate seat occupied by Sen. Carl Levin


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Key Players – Future Chairmen

Ron Wyden(D-Ore.)

Elected: 1996; 4th term

Paul Ryan(R-Wis.)

Elected: 1998; 8th term

Both are expected to helm the tax writing committees in 2015

While ideologically on opposite sides of the political spectrum –in December 2011 they attracted attention for working together on a Medicare reform plan

Concern for comprehensive tax reform – will chairmen be as dedicated or switch their focus to main driver of debt – entitlement reform


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Key Players - Administration

Mark Mazur

Assistant Secretary for Tax Policy

John Koskinen

Confirmed: December 20, 2013

Confirmed: August 2012

  • In December, the Senate confirmed him as the next IRS Commissioner by a 59 to 36 vote.

  • Koskinen, 74-year old former Freddie Mac executive, has a history of turning around distressed organizations

  • Served in the Office of Management and Budget (OMB) during the Clinton-era.

  • Responsible for developing, analyzing, and coordinating Treasury's and the Administration's agenda, policies, and guidance on tax issues. 

  • Internal Revenue Service, Director of Research & Analysis

  • Joint Committee on Taxation

  • National Economic Council under President Clinton


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  • Key Players Moving

Chairmen – Camp-Baucus

Baucus announced as nominee for US Ambassador for China

Camp has backing from Speaker but not a long leash due to politics

Camp met with his leadership in December – outcome was get the votes then move bill

Future Chairmen – Ryan-Wyden

Status quo election in 2014 could allow carryover of progress

Wyden agenda will be key marker for which committee issues move (health, trade)

Committee Staff

Baucus had 3 high level staff departures – unclear if Wyden will rearrange staff

Camp beefed up his tax cadre since 2011 – unsure which committee staff will remain in 2015

Administration

No engagement until the appearance of a concrete plan from Congress (post 2014?)


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Content


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  • AGC Tax Policy Principles

  • Economic growth should be the goal of tax reform

  • Tax policy should not pick winners and losers

  • Higher taxes should be supported if the money collected is dedicated to public works projects

  • Clarity, simplicity and certainty should be the goals of tax reform

  • Dollar thresholds should be indexed to avoid stealth tax increases

  • A three year phase in of tax policy would be preferable to deal with long term contracts

  • Lower rates are preferable to more deductions, and limits on deductions should be looked at if they accompany rate cuts. Of the deductions, it was determined that accelerated depreciation was an extremely important policy for the industry

  • A gross receipts tax or value added tax would be bad for the construction industry


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Construction Industry Tax Priorities


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Construction Industry Tax Priorities


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Construction Industry Tax Priorities


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Released Finance Committee Drafts

  • In November & December, Chairman Baucus unveiled three discussion drafts. The policy proposals are meant to build momentum in Congress for a corporate tax overhaul.

  • Tax administration: Reduce complexity, increase compliance and ensure taxpayer rights.

  • Cost recovery and accounting: Businesses could face additional taxes as a result of lengthening tax depreciation and amortization benefits, and curtailing expensing. The anticipated new revenue — $700+ billion over 10 years — would be used to offset the cost of cutting the corporate tax rate. Baucus reportedly wants to reduce rates to below 30 percent.

  • International taxation: Companies could incur a one-time tax of $200 billion on accumulated earnings. Future foreign earnings would be taxed under a lower corporate income tax rate of less than 30 percent, partially offset by a minimum tax on all foreign income as it is earned.

  • Energy taxation: Consolidate 42 provisions in to 2 simplified technology-neutral tax credits for the domestic production which phase out as GHG intensity of each market has declined by 25 percent as determined by the EPA.


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Cost Recovery & Accounting Draft

  • The staff discussion draft proposes a modernized set of rules that are “simpler, fairer, and lessen tax burdens on small businesses.”  Revenue raised used to reduce the corporate tax rate. 

    • Replace current MACRS and ADS with a system that approximates economic depreciation based on estimates from the Congressional Budget Office. 

    • This new system would use a pooling method rather than requiring taxpayers to calculate depreciation for separate assets. Reduce the number of major depreciation rates from more than 40 to 5.

    • Treasury would have regulatory authority to reassign assets to different pools or to create new asset classes.

    • Elimination of bonus depreciation

    • Permanently increase Section 179 expensing to $1 million and expand the definition of qualifying expenses. 

  • Chairman Baucus requested that CBO produce a letter detailing their analysis of economic depreciation rates of tangible assets. Proposed effective date: taxable years beginning after 2014

  • Committee staff is looking for feedback from stakeholders by January 17, 2014


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Cost Recovery & Accounting Draft

  • Assets would be assigned to pools based on specific asset classes (end of year pool adjusted basis is multiplied by an assigned percentage to determine the depreciation deduction for the year).

    • Pool 1 (38%) – annual economic depreciation 20 percent or more

      • Includes computers, computer software, business automobiles

    • Pool 2 (18%) – annual economic depreciation 12 to 20 percent

      • Hard to generalize, but includes trucks, farming assets, Distributive Trades or Businesses (Asset Class 57.0), some manufacturing assets

    • Pool 3 (12%) – annual economic depreciation 6 to 12 percent

      • Includes most manufacturing asset classes, air transportation, most oil production and refining, office furniture, section 1245 property without an assigned asset class

    • Pool 4 (5%)– annual economic depreciation under 6 percent

      • Includes non-building land improvements, pipelines, water transportation, most non-real property utility property, solar and wind energy

Source: KPMG 12/3/13


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  • Senate Finance Committee “Staff Discussion” Draft

  • Cost Recovery Draft

  • Comparison with House Ways and Means


Agc financial issues forum january 2014

AGC Financial Issues Forum Winter Meeting

  • Senate Finance Committee “Staff Discussion” Draft

  • Cost Recovery Draft


Agc financial issues forum january 2014

AGC Financial Issues Forum Winter Meeting

  • Senate Finance Committee “Staff Discussion” Draft

  • Cost Recovery Draft


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Cost of Reform

  • JCT and Finance Committee majority staff determined that every $2 trillion of individual tax expenditures that are added back would, on average, raise each of the seven individual income tax brackets by between 1.3 and 2.2 percentage points from what they would be under a blank slate. 

  • Every $200 billion of corporate tax expenditures that are added back would, on average, raise the top corporate income tax rate by 1.5 percentage points from what they it would be under a blank slate. 

Estimated Revenue Cost (Billions) 

Source: JCT Tax Expenditure Estimates, October 2011


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Tax Extenders

  • Chairman Baucus’s departure could ease action on a package of temporary tax breaks lawmakers routinely renewed known as “extenders.” Baucus & Camp had been holding them in abeyance to focus attention on tax reform efforts.

  • Senator Wyden stated he wanted to take up those breaks sooner rather than later. “Even a relatively short period really can harm the kind of investment and certainty and predictability” that’s needed for businesses that rely on the breaks.”

  • Extending all 55 provisions would increase the deficit by about $50 billion per year.

  • Will deficit hawks require offsets?


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Tax Extenders

  • List of the tax extenders along with their costs for 2013 and 2014, as was estimated by the Joint Committee on Taxation after their extension on January 1, 2013.  

  • JCT has not released any cost estimates for renewing these provisions for 2014 and beyond. 

Estimated Revenue Cost (Billions) 

Source: JCT Tax Expenditure Estimates, February 2013


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Extenders to Consider

 The Urban Institute released an evaluation of the New Markets Tax Credit (NMTC) based on projects launched between 2002 and 2007.

In its early years, the NMTC program operated as intended—encouraging investments in low-income areas for a diverse range of community- and economic-development projects associated with varying results.

About two-thirds of projects, accounting for about three-quarters of all project costs, consisted of construction or rehabilitation of commercial or residential real estate (including office buildings, housing, mixed-use, and retail properties).

Based on the evidentiary review, it can reasonably be concluded that between three and 4 of every 10 early-year projects would likely not have proceeded without NMTCs; about 1 of every 10 projects would likely have proceeded without NMTCs, but probably in a different location or on a delayed schedule.

Source: NMTC Coalition Economic Impact Report 2003-2012


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Strategy


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AGC Responses

  • April 2013

  • Submitted comments to the W&M pass-through group highlighting 179 Expensing, Percentage-of-Completion Accounting, Look-back Accounting

  • July2013

  • Submitted comments to SFC for blank slate deadline

  • January 2014

  • Plan to submit comments to SFC for capitol cost recovery staff discussion draft highlighting:

    • MACRS

    • 179 expensing

    • 179D

    • Accrual method threshold

    • 15-year leasehold improvements,

    • Removal of “home construction contract” classification


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Comprehensive Reform

AGC has been a leader in Washington circles to engage coalitions and the tax committees to promote a comprehensive message (C-corp & pass-throughs) when reforming business rates.

Leaders of the RATE Coalition and the Coalition for Fair Effective Tax Rates stressed at a joint Capitol Hill event that both the individual and corporate sides of the code need to be revamped.


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What IndustriesPay

Establish effective tax rates as the best metric to make meaningful comparisons among policy choices and how they would impact different business types and industries


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What Companies Pay

  • Choosing a Company’s Tax Rate for Tax Overhaul

  • A popular measure used by companies to understand taxes paid relative to profit.

  • Lawmakers also use ETRs in comparing taxes paid by businesses and assess the impact a tax provision may have on industry ETRs when deciding among potential base-broadeners

  • Three important factors that influence a company or industry’s effective tax rate:

    • Variation in definitions of tax and income

    • Timing and data issues

    • Accounting methods


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Politics


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AGC Financial Issues Forum Winter Meeting

LingeringQuestions

  • Can lawmakers ever settle the question as to whether tax revenues are high enough or need to rise further?

  • Will business community accept repealing or modifying long-standing tax rules, even in exchange for lower rates?

  • Will individual taxpayers have sticker shock when they see which loopholes have to be closed in tax reform?

  • Will the House move forward without acknowledgement of progress from the Senate?


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Political Realities

  • Democratic Leadership in Congress

    • Use tax reform to raise revenue for social & health programs

    • Tax the rich and oil & gas for middle-class & low-income tax preferences

  • House Republican Fiscal Hawks

    • Waver on anything that smells like a tax increase or too large of a bill

    • Incumbents fear radical primary challengers

  • Democrats in Senate

    • Having a hand in crafting a tax measure could stall efforts

    • Will want to save tax provisions for their constituencies or filibuster

  • House Republican Leadership

    • Wary of moving a bill that jeopardizes their majority status if the Senate slow-walks

    • Need House Democrats to advance bill on the House floor


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AGC Financial Issues Forum Winter Meeting

Hurdles for Reform

  • Unlikely at this point that Democrats would reverse course and allow the next debt limit increase to be used to address policy issues

  • Shortened congressional schedule for action; slim odds of reaching an agreement on revenue levels for tax reform

  • “Dynamic Scoring” could help: Economists agree that a tax change that trades inefficient tax subsidies for lower business tax rates should generate more economic activity. CBO signal on scoring the Senate’s immigration bill proved important to passage in at least that chamber

  • Tough to see reformers overcoming barriers and enacting tax reform without it being part of a larger agreement, but tax reform does have bipartisan support in both the House and Senate

  • Broader Structural Problems: Deeply divided environment in Washington makes it challenging to pass any legislation (inter & intra party strife)


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Outlook


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What’s Ahead

Baucus and Camp have not laid out all of their cards

  • Other important tax expenditures, such as Section 199 and interest deductibility could also face repeal or reduction

  • No legislative drafts with specific tax rates for c-corps and pass-throughs released

  • Camp will continue facing political conflict in 2014

    • If Camp's proposals are released, the tax policy discussion could focus less on Camp's goals and instead more on how his proposals may align or conflict with the administration's FY2015 budget, which should also be released in February 2014.


  • Agc financial issues forum january 2014

    AGC Financial Issues Forum Winter Meeting

    What’s Ahead

    • Incoming Chairmen are waiting in the wings

      • Wyden and Ryan have deeper policy differences and stronger support from the bases of their respective parties than the current chairmen, so if tax reform doesn’t happen in 2014, the legislative landscape will look much different in 2015 and 2016. So different, in fact, that tax reform may have to wait for a new president.

      • Even if tax reform legislation were not to be enacted in this Congress, the efforts of both congressional committees are sufficiently comprehensive that they may set the agenda for tax reform efforts

    • Tax extenders extended retroactively sounds the death knell for tax reform in 2014

      • $50+ billion in annual business tax extenders have a significant impact on business investment decisions


    Agc financial issues forum january 2014

    AGC Financial Issues Forum Winter Meeting

    Probability for Reform

    • Most observers believe Chairman Camp will release a specific tax reform plan with rates, base-broadeners, and revenue estimates in 2014. A good number also think the W&M Committee will begin a tax reform markup in 2014.

    • Many experts believe there is a 15-20% chance for reform in 2014 and that the environment for comprehensive reform will be better after 2016.

    • House

    • 75% chairman releases tax reform proposal

    • Better than 50% committee begins markup of tax reform legislation

    • Less than 50% committee approves tax reform legislation

    • 20% chamber passes comprehensive tax reform legislation

    • Senate

    • Slightly better than 50% chairman releases reform proposal (if he keeps gavel)

    • Less than 10% chamber passes comprehensive tax reform legislation


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    AGC Financial Issues Forum Winter Meeting

    Questions


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