1. Tax Legislative Update
Tax Legislative Update
Andrew Prior, Managing Director, Washington National Tax Services

2. Factors affecting US tax policy

3. Case for US tax reform High statutory corporate tax rate and uncompetitive international tax system
Changes in global tax environment since last US tax reform effort

4. US economic outlook GDP growth forecast – 2% versus 3% historical average
Source: Bureau of Economic Analysis, July 2016, and Blue Chip Indicators, August 10 and April 10, 2016.

5. US federal budget outlook Spending growth is outpacing revenue growth
Source: Congressional Budget Office, The Budget and Economic Outlook: 2016 to 2026 (January 2016); PwC calculations.

6. US federal budget outlook Spending growth due to Social Security, major health programs and interest
2016
2046
Net Interest 5.8%
Deficit (8.8%)
Net Interest 1.4%
Deficit (2.9%)
Other Noninterest Spending 7.3%
Other Revenues 1.5%
Other Revenues 1.7%
Corporate Tax 1.6%
Other Noninterest Spending 9.2%
Corporate Tax 1.8%
Payroll Tax 5.8%
Payroll Tax 5.9%
Major Health Care Programs 8.9%
Major Health Care Programs 5.5%
Individual Tax 8.8%
Individual Tax 0.5%
Social Security 6.3%
Social Security 4.9%
Source: Congressional Budget Office, The 2016 Long-Term Budget Outlook (July 2016).

7. PATH Act – 2015 year-end tax extender package
Permanent Tax Extenders (22)
Expiring in 2016 (30)
Expiring in 2019 (5)
Other Provisions
Research credit
Subpart F exceptions for active financing income
Section 179 expensing limits
15-year cost recovery for qualified leasehold, restaurant, and retail improvements
Deduction for state and local sales taxes
Exclusion parity for employer- provided mass transit and parking benefits
Charitable giving provisions (e.g., tax-free charity IRA rollover)
Expanded child credit, EITC and American Opportunity Tax Credit provisions
199 deduction for income from domestic production activities in Puerto Rico
Electricity production and investment credit for non-wind renewable power facilities
Additional renewable energy and energy efficiency provisions
Deduction for qualified tuition and related expenses
Interest deduction for mortgage insurance premiums
Exclusion for discharge of indebtedness on principal residence
Medical expense deduction: 7.5% AGI floor for individuals age 65 and older
Bonus depreciation (subject to phasedown) and election to accelerate AMT credits
CFC look-through treatment
Electricity production and investment credit for wind renewable power facilities
Work Opportunity Tax Credit
New Markets Tax Credit
Medical device excise tax suspended for 2016 and 2017
Excise tax on high-cost employer-provided health benefits (“Cadillac tax”) delayed until 2020
FIRPTA provisions, including exclusion for foreign pension and retirement funds investing in US real estate
REIT provisions, including restrictions on tax-free spinoffs

8. Post-election tax policy outlook

9. A “perfect storm” for business tax reform
A “perfect storm” for business tax reform? Pre-election focus on divided government and opportunity for incremental reform
“I think the combination of Europe moving pretty aggressively on the state aid issue and the…bipartisan desire to find a way to pay for more aggressive infrastructure creates perhaps the perfect storm where you can overcome the inertia of inaction.” – Treasury Secretary Jack Lew (October 6, 2016)
Total IRF earning balances (US $ Billion)
“We feel there’s one catch phrase that sums up EU State aid rulings.”

10. 2016 election results – Republican sweep Increased potential for major US tax law changes in 2017
46.5% votes | 62,352,375
270 electoral votes to win
64,429,062 | 48.1% votes
306 trump
Clinton 232
2016 Elections – Final results as of Nov. 28,11 AM ET
2014
2014
2016
2016
Republicans
Democrats
Undecided
2014
2016
Republicans
247
239
Democrats
188
193
Undecided 3
2016 Net change
House Ds +6
2014
2016
Republicans 54 51
Democrats* 46 48
Undecided 1
2016 Net change
Senate Ds +2
*includes two Independents: Senators Bernie Sanders (I-VT) and Angus King (I-ME)

11. President-elect Trump’s first 100 days agenda Tax reform may have to compete with other Administration priorities
Tax reform
Health care reform (ACA repeal and replace)
Infrastructure
Trade (NAFTA, Trans- Pacific Partnership)
Financial regulation (D0dd-Frank)
Energy (Keystone pipeline)
Environmental de-regulation
Immigration

12. Key dates affecting tax legislative agenda
2016
November 8
Election Day
November 15
114th Congress “lame duck” session began
December 9
Temporary government funding measure (“continuing resolution” or “CR”) expires
December 16
Target adjournment date
2017
January 3
New Congress (115th) begins
January 20
Inauguration Day
January/February
President delivers annual State of the Union address
February 6
Deadline for submission of Administration’s FY 2018 budget
March 15
Suspension of federal statutory debt limit expires
April 15
Deadline for adoption of Congressional budget “resolution”
August
Congressional summer recess period
September 30
FAA authorization and Airport and Airway Trust Fund taxes expire
October 1
New federal government fiscal year (FY 2018) begins; “sequestration” spending caps reinstated

13. Comparison of Republican individual tax reform proposals
2014 Camp Tax Reform Bill
House GOP Tax Reform Blueprint
President-Elect Donald Trump
Individual tax rate
10% and 25% with 10% surtax on modified AGI
12%, 25% and 33%
12%, 25%, and 33%
Individual AMT
Eliminate
Investment income
Tax capital gains and dividends as ordinary income with 40% exclusion
Tax carried interest as ordinary income
Tax capital gains, dividends, and interest as ordinary income with 50% exclusion (16.5% top effective tax rate)
Modify tax treatment of carried interest
20% top tax rate on capital gains, dividends and interest
Eliminate 3.8% net investment tax
Tax “carried interest” as ordinary income
Standard deduction
$22,000 (joint) and $11,000 (other)
$24,000 (joint), $18,000 (single with child), and $12,000 (other)
$30,000 (joint) and $15,000 (single); no head of household filing status
Itemized deductions
Limits or repeals many current-law deductions, including mortgage interest ($1 million cap gradually reduced to $500,000) and charitable contributions (2% floor)
Eliminate all except mortgage interest and charitable contributions
Limit to $200,000 (joint filer) and $100,000 (single filer)
Estate tax
Two tax rates: 25% and 35%
Eliminate and tax capital gains held until death with $5 million per-person exemption ($10 million per couple)

14. Comparison of Republican business tax reform proposals
2014 Camp Tax Reform Bill
2016 House GOP Blueprint
President-Elect Trump
Corporate tax rate
25% with 5-year phase-in
20%
15%
Corporate AMT
Repeal
Pass-thru business tax rate
Current law
25% pass-thru business tax rate with “reasonable compensation” taxed as ordinary tax rates
Election to apply 15% rate, with large pass-thru subject to dividend tax rate on retained earnings
Cost recovery
Repeal MACRS and implement ADS- type system with inflation adjustment
100% expensing for equipment and real property (not land)
100% expensing election for US manufacturers
Interest expense deduction
Adopt thin capitalization rules and tighten earnings stripping rules
Deductible only against net interest income; special rules for financial services
No deduction for US manufacturers that elect full expensing
Domestic production (section 199)
Phase out and repeal section 199
Repeal section 199 deduction
Eliminate most business tax preferences
Research & development
Permanent alternative increment research credit and 5-year amortization
Business credit to encourage R&D
Maintain R&D credit
Foreign repatriation
One-time mandatory tax (8.75% cash and 3.5% other) with 8-year payment period
One-time, mandatory tax (8.75% cash and 3.5% other)
10% one-time, mandatory tax
International tax
95% dividend exemption system
100% dividend exemption system; border adjustment that exempts exports and taxes imports
Not stated

15. Comparison of Republican tax reform proposals
CBO Baseline
(billions of dollars, 2016 – 2025)
2016 House GOP Blueprint
President-Elect Trump*
“Static”
“Dynamic”
Individual Income Taxes
20,265
(981)
566
(2,192)/(3,730)
(1,058)/(2,458)
Payroll Taxes
13,025
683
520/612
Corporate Income Taxes
3,634
(1,197)
(1,324)
(1,936)
(1,958)/(1,959)
Excise Taxes
1,059 57
44/52
Estate and Gift Taxes
263
(240)
Other Revenue
1,696 68
52/62
Total
39,942
(2,418)
(191)
(4,368)/(5,906)
(2,640)/(3,932)
Source: Tax Foundation (July and September 2016); Congressional Budget Office (August 2016)
* Includes two estimates for “higher-rate” and “lower-rate” assumptions regarding pass-through taxation

16. Questions?

17. Thank you
Andrew Prior, Managing Director, Washington National Tax Services
Washington D.C.
(202)
This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US federal, state or local tax penalties.
© 2016 PwC. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.