kenneth kies - keynote

Tax and Budget Policy as

We approach the 2012

Election and 2013

47th Annual Bank and Capital Markets

Tax Institute

Orlando, Florida

November 8, 2012

Kenneth J. Kies

Managing Director

Federal Policy Group

A Practice of Clark & Wamberg

View from Washington

Overview

Federal Fiscal Outlook

Economic Outlook

Debt Ceiling Outcome

Massive Tax Uncertainty

Election Outcome

How Popular is Congress

What Were the Game Changers

The Outlook for 2011

Federal Fiscal Outlook

Deficit Outlook Under Obama Budget

$1,413

$1,293 $1,300 $1,095

$991

$661$595 $615

$576 $543 $578 $604 $627

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

An

nu

al

De

fic

it (

$ b

illio

n)

Fiscal Year

Annual Budget DeficitBaseline vs. Obama Budget

CBO Baseline Obama Budget

Source: CBO Baseline Budget Outlook, August 2012/ President Obama’s budget for fiscal year 2013, Mid-Session Review, July,2012

Federal Debt Outlook: Treasury

Total Public Debt

$19.4

$20.3

$18.5

$17.5

$16.2

$9.9

$11.9

$13.5

$15.4

$0

$5

$10

$15

$20

2008 2009 2010 2011 2012 2013 2014 2015 2016

Fiscal Year

Pu

blic

ly H

eld

De

bt

($ T

rillio

ns

)

Source: President Obama’s budget for fiscal year 2013, Mid-Session Review, July, 2012

Federal Debt Outlook: Treasury

Total Public Debt (As % of GDP) -- Treasury

69%

84%

93%

102%105% 106% 106% 107% 108%

0%

20%

40%

60%

80%

100%

120%

2008 2009 2010 2011 2012 2013 2014 2015 2016Fiscal Year

Source: Annual Report on the Public Debt, June, 2011

Obama Deficits Would Be Historic

At 10% of GDP ($1.412 trillion), FY 2009 budget deficit was the highest in the nation’s history other than during World War II.

At 8.7% of GDP, ($1.291 trillion) FY 2010 budget deficit was the second highest in nation’s history other than during World War II.

At 8.7% of GDP ($1.296 trillion) FY 2011 budget deficit ties for being the second highest in the nation’s history other than World War II.

At 7.0% of GDP ($1.1 trillion) FY 2012 budget deficit will be the third highest in the nation’s history other than World War II.

Deficit during World War II – FY 1942 deficit: 14.2%

– FY 1943 deficit: 30.3%

– FY 1944 deficit: 22.7%

– FY 1945 deficit: 21.5%

Key difference between then and now – Then:

1. Budget back in surplus (1.7% of GDP) by 1947 and in 1948 generated largest annual surplus (4.6% of GDP) in nation’s history

2. From 1947 through 1977, federal budgetary policies reduced the federal debt as a percent of GDP by an average of 4% per year

– Now: 1. From 2011 through 2020, annual budget deficits will average 5% of GDP

2. During the same time period, federal budgetary policies will increase the federal debt as a percent of GDP by an average of 3.3% per year

Source: FPG Analysis of CBO estimates

State of the Economy

Economic Outlook

States in Fiscal Crisis

States and Cities in Fiscal Crisis

States face over $4 trillion pension funding shortfall

– A 2012 Harvard Kennedy School study found that all 50 states collectively face a public pension shortfall of up to $4.4 trillion.

“For purposes of comparison, an unfunded liability of $4.4 trillion would constitute a substantial 33% of the 2011 real U.S. GDP of $13.32 trillion.”

Underfunded Public Pensions in the United States, 2012

– Unfunded pension liabilities are the dark cloud on the horizon of state budgets; a cloud totaling trillions of dollars… Though they represent unavoidable fiscal debt, pension liabilities often slip under the radar when states tally up their spending, thanks to their status as "future payments" and accounting games. Aggressive pension reform is urgently needed in almost every state:

StateBudgetSolutions.org, October 9, 2012

– New accounting rules could TRIPLE projected funding gap: The Washington Post, August 16, 2012

States and Cities in Fiscal Crisis

States face trillions in pension funding shortfall (continued)

– Government pensions rate of return doubted by some The Courier-Journal, October 8, 2012

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)

Wall Street Journal, October 7, 2012

Some cities face bankruptcy

– “Los Angeles could go bankrupt if it doesn't overhaul its finances with new taxes, possible layoffs and the privatization of some city services, the city's top budget official says.” San Francisco Chronicle, April 7, 2012

– Stockton, California's City Council “was poised to approve a budget plan for possible bankruptcy filing.” The Wall Street Journal, June 27, 2012

– “Atwater, California files for bankruptcy.” Reuters, October 4, 2012

Economic Indicators

Consumer confidence

– Rose to 70.3 in September, up from 60.6 in August 2012

– A confidence rating that is between 90 and 100 indicates that the

economy is on solid footing. (source: Conference Board)

Unemployment

– Unemployment in October increased to 7.9% from September’s 7.8%.

In October, 171,000 net new jobs were created.

– Roughly 200,000 jobs must be created every month to maintain

current unemployment rate.

Record Number of Youth Unemployed

– Nearly One-Quarter of workers between the ages of 16 and 19 were unemployed in September, 23.7%, an increase since January’s 23.2%.

– “[P]art of the [job] growth came from a surge in the number of people taking part-time jobs because full-time slots weren't available. That suggests employers continue to be reluctant to expand in the face of threats to the U.S. and global economies, including deteriorating conditions in Europe and the prospect of year-end spending cuts and tax increases in the U.S

- The Wall Street Journal, October 5, 2012

Underemployment

– BLS shows 14.6% of American workers in October were either unemployed or working part-time, but wanting full time work.

– 40.1% of unemployed in September had been out of work for at least 27 weeks.

– The long-term unemployment rate has remained at or above 40 percent every month since March of 2010.

– “Never before in the postwar period have the unemployed been unemployed for so long.”

- Federal Reserve Bank of Richmond

Economic Indicators

Residential real estate

– “Sales of previously owned U.S. homes in March unexpectedly fell for the third time in the last four

months, showing an uneven recovery in the housing market.” - Bloomberg, April 19, 2012

– “Many homeowners who would like to sell their home are not placing them on the market because they are worried home prices might dip again. Others can't sell because they are underwater on their mortgage, meaning they owe more than their home is worth.”

- Huffington Post, September 5, 2012

– “While property markets across the country rose together during the housing boom and fell together during the crash, new data analyzed by real-estate firm Zillow Inc. for The Wall Street Journal show that markets are exiting the downturn at different speeds.”

- The Wall Street Journal, June 20, 2012

Most recent GDP growth numbers were discouraging. First quarter was 2%, down from 3.0 for Fourth Quarter 2011. Second quarter growth was a dismal 1.3%. Third quarter was a little better at 2.2%.

-Commerce Department, September 27, 2012

Is the U.S. Recovery in Free Fall?

"US risks tepid recovery turning into recession,

IMF warns"

- The Telegraph, July 3, 2012

CEOs Pessimistic Economic Outlook

CEOs envision slower economic growth for 2012 and have lowered expectations for sales, and hiring.

More CEOs expect hiring to decline in the next six months than think that hiring will increase, 34% versus 29%.

Fewer CEOs think sales will increase in the next six months, 58% in Q3 versus 75% in Q2.

Debt Crisis in Europe continues to have negative effect on U.S. economy.

“Sales are going down fast in Europe,”

Jim McNerney, Chairman Business Roundtable

Fiscal Cliff becomes more worrisome at year-end grows closer.

“The closer you get, the more nervous you get,”

Jim McNerney, Chairman Business Roundtable

Source: Business Roundtable CEO Economic Outlook

Déjà vu all over again ?

“If history is a guide, the odds that the American economy is

falling into a double-dip recession have risen in recent weeks and

may even have reached 50 percent… The United States appears to

have entered some version of the vicious cycle. Most ominously,

job growth has slowed to a pace that typically signals the start of a

recession."

- New York Times, September 8, 2011

“The U.S. economy is in a vicious cycle in which countless

interventions and bailouts have resulted in distorted financial

markets… The labor market still isn’t growing at a sustainable

pace that keeps up with population growth.”

- The Wall Street Journal, July 11, 2012

The Debt Ceiling Deal

Agreement to Increase the Debt Limit

$900 Billion Initial Increase in the Debt Limit

– Increased in two tranches: $400 billion and $500

billion

– $500 billion occurs if Congress doesn’t block it

$917 Billion in Spending Cuts tied to Initial Increase

Bill created a “Congressional Joint Select Committee

on Deficit Reduction” (a.k.a. “Super Committee”) to

locate up to $1.5 trillion in additional deficit reduction

If Committee failed to locate at least $1.2 trillion in

savings, across-the-board cuts kick in but not until

January 2, 2013.

Outcome of the Super Committee

Super Fail – USAToday, November 22, 2011

Deficit Panel Folds Its Tent – The Wall Street Journal, November 22, 2011

Super committee rests in pieces – The Christian Science Monitor, November 22, 2011

Deficit supercommittee announces failure – The Washington Times, November 21, 2011

Supercommittee Failure PosesThreat to U.S. – Bloomberg, November 22, 2011

Short Term Consequences

NOT MUCH

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

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

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

Translation:

The Family Budget was cut by $3.85, not $385

President Obama’s Deficit-Reduction Plan Uncovered

The Promise:

“It’s a plan to reduce our debt by more than $4 trillion.”

- President Obama, September 19, 2011


The Reality:

The plan INCREASES the deficit by

$3.049 TRILLION


The Math:

$4.850 trillion: Deficit-reduction purported in the President’s plan

Minus: $5.109 trillion: Tax cuts and spending increases the President seeks that are not in current law

Minus: $1.084 trillion: Troop withdrawal savings in the plan already anticipated

Minus: $1.349 trillion: Deficit-reductions included in the President’s plan that already have been enacted into law

Minus: $ .357 trillion: Additional Interest Expense on the Debt

____________

Equals:$ 3.049 trillion DEFICIT INCREASE

Entitlements Drive the Debt Higher

Source: The Wall Street Journal

Federal Revenues Are Depressed As Well

Revenues as a percent of GDP have averaged 17.8

percent since 1950

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%

Tax and Budget Outlook

Massive Tax Uncertainty

Deficit Reduction / Tax Reform

Sophisticated Discussion on Tax Reform?

The current tax code “is kind of screwy.”

President Barack Obama, April 6, 2011

Expiring Tax Provisions

January 1, 2013:

– Top individual rate remains at 35% through 2012.

– Bottom rate stays at 10%.

– Other marginal income tax rates also stay at 2010 levels.

– Top capital gains and dividend tax rates remain at 15% through 2012.

– Estate tax returns at 35 percent rate with a $5 million exemption

instead of $1 million exemption and a top rate of 55% rate, but only

through December 31, 2012.

Cost of extending 2001 and 2003 Tax Act cuts: $3.312 trillion (FY 2010-19).

Individual AMT:

– Temporary “patch” extended through 2011.

– Permanent patch at inflation-adjusted 2009 levels would cost $447

billion (2010-2019).

Pending Federal Tax Increases

Current Law Tax Increases to Take Effect in 2013 (includes effect of (1) higher top marginal ordinary income tax rate, (2) expiration of

qualified dividend tax rate, (3) expiration of reduced long term capital gains tax rate,

(4) imposition of higher Medicare tax)

Type of Income Top Rate

in

2011

Top Rate

in

2013

Percent

Change

In Rates

Earned Income 37.9% 43.4% 18.33%

Unearned Income (except Qualified Dividends

and Long Term Capital Gains)

35%

43.4%

27.4%

Qualified Dividends 15% 43.4% 197.3%

Long Term Capital

Gains

15% 23.8% 66.7%

Pending Federal Tax Increases (continued)

“Congress risks taking the economy over a ‘massive fiscal cliff,’

Federal Reserve Chairman Ben Bernanke warned lawmakers on

Wednesday.

In remarks that hit Wall Street stock prices, the central bank

boss suggested the economy could hit a serious roadblock if

Congress allows the Bush tax rates and payroll tax cut to expire

and $1.2 trillion in spending cuts to be implemented

simultaneously in January.”

- The Hill, March 1, 2012

Common Theme: Tax Expenditures

Prime Targets

Tax Expenditure for Individuals Estimated Cost (2010 – 2014)

Health Care Exclusion $ 659 billion

Home Mortgage Deduction $ 484 billion

Reduced Taxes on Investments $ 402 billion

Defined Benefit Plans $ 303 billion

Earned Income Credit $ 268 billion

State and local, Sales Tax,

and Property Tax Deductions $ 237 billion

Defined Contribution Plans $ 212 billion

Charitable Deductions

(excluding Health and Education) $ 187 billion

Medicare – Hospital (Part A) $ 175 billion

Social Security/RR Retirement $ 173 billion

Cafeteria Plan Exclusion $ 163 billion

Inside Buildup $ 149 billion

Joint Committee on Taxation “Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014,” December 15, 2010

Prime Targets

Corporate Tax Expenditures Estimated Cost (2010-2014)

Deferral of active income of controlled foreign corporations $ 70.6 billion

Exclusion of interest on public purpose State and local government debts $ 45.3 billion

Deduction for income attributable to domestic production activities $ 43.2 billion

Inventory property sales source rule exception $ 38.0 billion

Depreciation of Equipment in excess of alternative depreciation system $ 37.1 billion

Inclusion of income arising from business indebtedness

discharged by the reacquisition of debt instrument $28.8 billion

Tax Credit for low-income housing $ 27.0 billion

Expensing of research and experimental expenditures $ 25.6 billion

Inventory methods and valuation: Last in first out $ 20.0 billion

Reduced rates for first $10,000,000 of corporate taxable income $ 15.9 billion

Joint Committee on Taxation “Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014,” December 15, 2010

Election Outcome

2012 Election Outcome: President

President Obama wins re-election

Electoral Vote:

Obama 303*

Romney 206 *Obama has a slight lead for Florida’s 29 Electoral Votes, which have not yet been

awarded.

Popular Vote:

Obama 50% (60,144,795 votes)

Romney 48% (57,443,964 votes)

National Electoral College Results

Obama

Romney

270 votes

needed to win

303 Obama

206 Romney

2012 Electoral

Map

29 Unknown

Obama

Romney Barack Obama (D)

Mitt Romney (R)

Unknown

12

7

55

6 6

4

10 5

9

3

3

3

3

3

5

7

6

HI 4

38 8

6

10

6

10 10

20 11

16

18

8

9

NH 4 MA 11

CT 7 RI 4

NJ 14

DE 3 MD 10

DC 3

VT 3

29

16

4

6

15

29

20

9

11

13 5

National Popular Vote Results

173 Romney

Romney

Obama

55%

54%

57%

52%

62%

HI 72%

55%

73%

67%

55%

69%

51%

53%

58%

58%

61%

60%

67%

54%

52%

53%

52%

53%

57% 54% 50%

61%

59%

61%

57% 59%

55% 61% 53%

55%

51%

51%

52%

62%

VT 67% 56%

NH 52%

MA 61%

CT 57% RI 63%

NJ 58%

DE 59%

MD 61% DC 91%

Barack Obama (D)

Mitt Romney (R) 50% 100%

Unknown

2012 Popular Vote Map

62%

National Total

• 50% Obama

• 48%

Romney

Source: Exit polls results available at http://www.cnn.com/election/2012/results/race/president#exit-polls

2012 Presidential Election Votes by Demographic

Voted for Obama Voted for Romney

Gender Women 55% 44%

Men 45% 52%

Race

White (non-Hispanic) 39% 59%

Black 93% 6%

Hispanic 71% 27%

Education Non-College Graduate 51% 47%

College Graduate 50% 48%

Age

18 to 29 years 60% 37%

30 to 44 years 52% 45%

45 to 64 years 47% 51%

64+ years 44% 56%

Income

Less than $50,000 60% 38%

$50,000 to $100,000 46% 52%

$100,000 or more 44% 54%

2012 Election Outcome: Senate

Democrats pick up Republican seats in ME, MA, and IN

Republicans pick up Democratic seat in NE

Democrats Republicans

Current (112th)

Congress 53

(includes one independent

caucusing with D’s)

47

Incoming (113th)

Congress 55

(includes two independents

expected to caucus with D’s)

45

2012 Election Outcome: House

Republicans easily retain control of the House. Democrats needed a net

gain of 25 seats. With 12 seats yet to be decided, Republicans thus far

have lost a net of only two, a total that is unlikely to increase more than a

very few seats, if at all.

Despite the huge gain of 63 seats in 2010, which often portends loss of

marginal seats in the next election, Republicans suffered only modest

losses.

Democrats made very few inroads outside CA, IL, NY, and NH, which were

largely offset by scattered GOP gains.

Republicans Democrats

Current (112th) Congress (figures include 5 vacancies)

240 190

Incoming (113th) Congress *12 seats not yet called

232* 191*

How Popular is Congress?

Real Clear Politics: 13.8% approve of how Congress is handling its job while 79.6%

disapprove, Aug 5 – Sept 17

How is Congress Doing?

The Bottom of the Barrel

Degree of Confidence

The Military: 78%

Small Business 64%

The Police 56%

The Church 48%

Hospitals 39%

Supreme Court 37%

The Presidency 35%

Justice System 28%

Newspapers 28%

TV News 27%

Banks 23%

Labor 21%

Big Business 19%

HMOs 19%

CONGRESS 12%

Gallup, June 23, 2011

What Were the Possible Game

Changers

Game Changers for 2012

Euro Zone Meltdown

Iran Nuclear Activity

North Korea

China Economy

Middle East Unrest

Natural Disasters

Terrorist Attack

Presidential Debates

Fast and Furious

Solyndra Bankruptcy

General Services Administration – “It didn’t stay in

Vegas”

Cartagena - Gate

Predictions

kenneth kies - keynote

Documents

world war

wall street

congressional

federal tax

reduction

president

federal debt

budget cuts