lunch keynote ken kies

Tax and Budget Policy in the Washington Swamp as We Approach Another Election

Year

Bank Tax InstituteOrlando, FL

November 14, 2013

Kenneth J. KiesManaging Director

Federal Policy Group

View from Washington

Overview

Federal Fiscal Outlook Economic Outlook Looming Deadlines On to the 2014 Election Outlook for Tax Reform in 2013 – Is More Redistribution

Needed? Tax Reform Predictions

The Outlook for 2013

Federal Fiscal Outlook

Deficit Outlook Under CBO

$1,413$1,294 $1,300

$1,087

$642$560

$378 $432 $482 $542$648

$733 $782

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Annu

al D

efic

it ($

bill

ion)

Fiscal Year

CBO Baseline

Source: CBO Baseline Budget Outlook, May, 2013

Federal Debt Outlook: White House

$16.1$17.0

$18.1$19.1

$20.0$20.9

$21.8$22.6

$23.4

$0

$5

$10

$15

$20

2012 2013 2014 2015 2016 2017 2018 2019 2020

Publ

icly

Hel

d De

bt (

$ Tr

illio

ns)

Fiscal Year

Total Federal Debt

Source: White House Updated Budget for Fiscal Year 2014, July 2013

Federal Debt Outlook: White House

106% 107% 107% 107% 106% 105% 104% 104% 103%

0%

20%

40%

60%

80%

100%

120%

2013 2014 2015 2016 2017 2018 2019 2020 2021Fiscal Year

Total Federal Debt (As % of GDP)

Source: White House Updated Budget for Fiscal Year 2014, July 2013

Debt to GDP Ratio is Likely Worse

ProjectedGDP Growth

2013 2014 2015 2016 2017 2018 2019 2020 2021

White House

3.3% 4.5% 5.2% 5.2% 5.2% 4.9% 4.3% 4.2% 4.1%

Federal Reserve(range)

1.8 -2.4%

2.2 –3.3%

2.2 –3.7%

2.2 –3.5%

2.1 –2.5%

2.1 –2.5%

2.1 –2.5%

2.1 –2.5%

2.1 –2.5%

CBO 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.3% 2.3% 2.3%

White House Projections on GDP Growthare More Optimistic than other Government Projections

Now Even Worse News

Entitlements Drive the Debt Higher

Federal Revenues Were 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%

But Revenues Have Recovered

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

% of GDP 16.9 18.0 19.1 19.1 18.9 18.8 18.7 18.7 18.9 19.0 19.1


The Interest Rate Time Bomb

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Billions $223 $237 $264 $313 $398 $497 $573 $644 $703 $764 $823

% of GDP 1.4 1.4 1.5 1.7 2.0 2.4 2.6 2.8 2.9 3.1 3.2

Total FedSpending(Billions)

$3,455 $3,602 $3,777 $4,038 $4,261 $4,485 $4,752 $5,012 $5,275 $5,620 $5,885

% of Total Spending

6.4% 6.5% 6.9% 7.8% 9.3% 11.1% 12.1% 12.8% 13.3% 13.6% 14%

10-yearTreas Notes

2.1 2.7 3.5 4.3 5.0 5.2 5.2 5.2 5.2 5.2 5.2

Federal Net Interest Expense


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

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

– “Illinois Weighs Plan to Climb Out of Pension Hole.” The Wall Street Journal, January 8, 2013

– “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's misery 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

Detroit: The Mother of all Pension Problems

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

A Crisis Among Our Young People

“Less than one-third of eight-graders can identify the historical purpose of the Declaration of Independence,

and it’s right there in the name.”

Former Supreme Court Justice Sandra Day O’ConnorSeptember 9. 2013

“In a survey conducted by the National Constitution Center, an independent nonprofit group, more teens could name the Three

Stooges than the three branches of government.”

GreatSchools.org

Don’t Know Much About Civics

Only 24% of fourth-grade students scored at the proficient level in civics.

Only 27% of High School Seniors scored at the proficient level.

Even in the last presidential election, when there was a surge in new voter registration, less than half of the eligible 18- to 24-year-olds voted.

2012 National Assessment of Education Progress Civics Report Card to the Nation

Looming Deadlines

Looming Deadlines

December 13, 2013 – Budget Conference Deadline

January 15, 2014 – Continuing Resolution Expires

February 7, 2014 – Debt Ceiling

How is Obamacare doing?

On to the 2014 Election

2014 Election: Rothenberg Report

Category SenatorsPure Toss Up Mary Landrieu (D-La)

Mark Prior (D-Ark)Max Baucus (D-Mont) (open)

Tilt Republican No one

Tilt Democrat Mark Begich (Alaska)Kay Hagen (NC)

Lean Republican Tim Johnson (R-S.D.) (open)Jay Rockefeller (D-W.Va.) (open)

Lean Democrat Tom Harkin (Iowa) (open)

Republican Favored Saxby Chambliss (Ga.) (open)Mitch McConnell (R-Ky)

Democrat Favored Jeanne Shaheen (NH)

Rothenberg Report, August 9, 2013

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

The Tax Code Has Become More Progressive

Year IncomeClass

% of TotalAGI

% of Total Income Tax Paid

2010 Top 1% 18.9% 37.4%

Bottom 50% 11.7% 2.4%

2007 Top 1% 22.86% 39.81%

Bottom 50% 12.19% 3.36%

2000 Top 1% 20.81% 37.42%

Bottom 50% 12.99% 3.91%

1990 Top 1% 14% 25.13%

Bottom 50% 15.03% 5.81%

1980 Top 1% 8.46% 19.05%

Bottom 50% 17.68% 7.05%

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

2012 Income Tax Liability for Individuals

IncomeClass

Total Tax Liability Total Returns Filed Average Tax Liability Per Return

$30,000and Below

($46.8 Billion) 53 Million $0

$30,001 -$200,000

$425.2 Billion 95.7 Million $4,473

$200,001and Above

$561.5 Billion 6.3 Million $89,047

Source: Joint Committee on Taxation , Estimate Of Federal Tax Expenditures For Fiscal Years 2012-2017, February 1, 2013

Taxes to Increase in 2013 for Wealthier Taxpayers

Sources: Joint Committee on Taxation, Estimate Of Federal Tax Expenditures For Fiscal Years 2012-2017, February 1, 2013White House Office of Management and Budget, January 8, 2013

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.

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

2012 Federal Tax Benefits Total Benefit for Incomes$200,001 and Above

Total Benefit for Incomes$200,000 and Below

Mortgage Interest $23.6 Billion $44.5 Billion

Student Loan Interest $0 $1.3 Billion

Education Credits $65 Million $11.8 Billion

Child Tax Credit $16 Million $56.7 Billion

Earned Income Tax Credit $0 $59 Billion

Child Care Credit $166 Million $3.1 Billion

Charitable Giving $21.6 Billion $16 Billion

Local Taxes (Including Sales) $24.1 Billion $19.6 Billion

Medical $1.4 Billion $10.3 Billion

Real Estate Tax $6 Billion $18.2 Billion

TOTAL $76.9 Billion $240.5 Billion

Tax Rates for California and New York City

StateTop Federal

Tax Rate(inc. 3.8%

Medicare tax)

Top State/Local Tax

Rate

Total Top Income Tax

Rate

California 43.4% 13.3% 56.7%New York City 43.4% 12.696% 56.096%

Selected Federal Means-Tested Programs and Refundable Tax Credits

Outlay for theFederal Government

1972(2012 Dollars)

1991(2012 Dollars)

2011(2012 Dollars)

Earned Income Tax CreditAmount Spent*% of all Tax Filers

00

$8 Billion7.6%

$55 Billion17.7%

Child Tax CreditAmount Spent*% of all Tax Filers

00

00

$28 Billion14.7%

Supplemental Security IncomeAmount Spent% of all U.S. Residents

00

$23 Billion1.8%

$49 Billion2.5%

AFDC/TANFAmount Spent% of all U.S. Residents

$18 Billion**

$20 Billion**

$18 Billion**

SNAP (Food Stamps)Amount Spent% of all US Residents

$9 Billion5.3% (11.1 million)



Housing AssistanceAmount Spent% of all Households

$5 Billion2.1%

$26 Billion4.1%

$39 Billion3.7%

Pell GrantsAmount Spent% of US Residents

00

$8 Billion1.3%

$36 Billion3.0%

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

The Outlook for 2013

Tax Reform Predictions

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