View from Washington

1. Tax and Budget Policy in the Washington Swamp as We Approach Another Election YearIowa Bankers Association 2014 Bank Management ConferenceDes Moines, IowaFebruary 12, 2014Kenneth J. KiesManaging DirectorFederal Policy Group

2. View from Washington

3. 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

4. The Outlook for 2013 Federal Fiscal Outlook

5. Deficit Outlook Under CBO Source: CBO Baseline Budget Outlook, February, 2014

6. Federal Debt Outlook: White House Source: White House Updated Budget for Fiscal Year 2014, July 2013

7. Federal Debt Outlook: White House Source: White House Updated Budget for Fiscal Year 2014, July 2013

8. Now Even Worse News

9. Entitlements Drive the Debt Higher

10. 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%

11. Revenues Continue to Recover Source: CBO Baseline Budget Outlook, February, 2014

12. The Interest Rate Time Bomb Federal Net Interest Expense Source: CBO Baseline Budget Outlook, February, 2014

13. 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

14. 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

15. 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

16. Translation: The Family Budget was cut by $3.85, not $385

17. State of the Economy

18. 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'smisery 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

19. Detroit: The Mother of all Pension Problems

20. 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

21. Looming Deadlines

22. 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

23. How is Obamacare doing?

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

25. Two Coverage Options: Above the waist or below the waist

26. Directions to your doctor’s office include “Take a left when you enter the trailer park.”

27. The tongue depressors taste faintly of Fudgesicles

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

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

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

31. Every one of their approved doctors are incarcerated

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

33. You receive notice that you are now a part time employee instead of full time.

34. On to the 2014 Election

35. 2014 Election: Rothenberg Report Rothenberg Report, January 23, 2014

36. How Popular is Congress?

37. 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

38. The Gallup Poll: June 13, 2013

39. 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

40. Outlook for Tax Reform in 2013 – Is More Redistribution Needed?

41. Sophisticated Discussion on Tax Reform? The current tax code “is kind of screwy.” President Barack Obama, April 6, 2011

42. The Tax Code Has Become More Progressive 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

43. Taxes to Increase in 2013 for Wealthier Taxpayers 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. 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

44. 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

45. Tax Rates for California and New York City

46. Selected Federal Means-Tested Programs and Refundable Tax Credits 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

47. Common Theme: Tax Expenditures

48. 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

49. 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

50. 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 billionover 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.