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Kenneth Kies - Keynote Presentation Transcript

  • 1. 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
  • 2. View from Washington Page 2
  • 3. Overview Federal Fiscal Outlook Economic Outlook Debt Ceiling Outcome Massive Tax Uncertainty Election Outcome How Popular is Congress What Were the Game Changers Page 3
  • 4. The Outlook for 2011 Federal Fiscal Outlook Page 4
  • 5. Deficit Outlook Under Obama Budget Annual Budget Deficit Baseline vs. Obama Budget $1,800 $1,600 $1,413 $1,400 $1,293 $1,300 $1,095 Annual Deficit ($ billion) $1,200 $991 $1,000 $800 $661 $627 $595 $615 $578 $604 $576 $543 $600 $400 $200 $0 Fiscal Year CBO Baseline Obama Budget Source: CBO Baseline Budget Outlook, August 2012/ President Obama’s budget for fiscal year 2013, Mid-Session Review, July,2012 Page 5
  • 6. Federal Debt Outlook: Treasury Total Public Debt $20.3 $20 $19.4 $18.5 $17.5 Publicly Held Debt ($ Trillions) $16.2 $15.4 $15 $13.5 $11.9 $9.9 $10 $5 $0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Fiscal YearSource: President Obama’s budget for fiscal year 2013, Mid-Session Review, July, 2012 Page 6
  • 7. Federal Debt Outlook: Treasury Total Public Debt (As % of GDP) -- Treasury120% 105% 106% 106% 107% 108% 102%100% 93% 84%80% 69%60%40%20% 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 Fiscal Year Source: Annual Report on the Public Debt, June, 2011 Page 7
  • 8. 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 Page 8
  • 9. State of the Economy Page 9
  • 10. Economic Outlook Page 10
  • 11. States in Fiscal Crisis Page 11
  • 12. 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 Page 12
  • 13. 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 doesnt overhaul its finances with new taxes, possible layoffs and the privatization of some city services, the citys top budget official says.” San Francisco Chronicle, April 7, 2012 – Stockton, Californias 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 Page 13
  • 14. 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. Page 14
  • 15.  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 werent 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 Page 15
  • 16. 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 cant 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 Page 16
  • 17. Is the U.S. Recovery in Free Fall? "US risks tepid recovery turning into recession, IMF warns" - The Telegraph, July 3, 2012 Page 17
  • 18. 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 Page 18
  • 19. 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 Page 19
  • 20. The Debt Ceiling Deal Page 20
  • 21. 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. Page 21
  • 22. 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 Page 22
  • 23. 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: $38,500,000,000Source: The Congressional Budget Office, Treasury Department’s Bureau of Public Debt Page 23
  • 24. 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 Page 24
  • 25. 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 Page 25
  • 26. Translation:The Family Budget was cut by $3.85, not $385 Page 26
  • 27. 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 Page 27
  • 28. President Obama’s Deficit-Reduction Plan Uncovered The Reality: The plan INCREASES the deficit by $3.049 TRILLION Page 28
  • 29. President Obama’s Deficit-Reduction Plan Uncovered The Math: $4.850 trillion: Deficit-reduction purported in the President’s planMinus: $5.109 trillion: Tax cuts and spending increases the President seeks that are not in current lawMinus: $1.084 trillion: Troop withdrawal savings in the plan already anticipatedMinus: $1.349 trillion: Deficit-reductions included in the President’s plan that already have been enacted into lawMinus: $ .357 trillion: Additional Interest Expense on the Debt ____________Equals:$ 3.049 trillion DEFICIT INCREASE Page 29
  • 30. Entitlements Drive the Debt HigherSource: The Wall Street Journal Page 30
  • 31. 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% Page 31
  • 32. Tax and Budget Outlook Massive Tax Uncertainty Deficit Reduction / Tax Reform Page 32
  • 33. Sophisticated Discussion on Tax Reform?The current tax code “is kind of screwy.” President Barack Obama, April 6, 2011 Page 33
  • 34. 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). Page 34
  • 35. 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 Top Rate Percent in in Change 2011 2013 In Rates Earned Income 37.9% 43.4% 18.33% Unearned Income 35% 43.4% 27.4% (except Qualified Dividends and Long Term Capital Gains) Qualified Dividends 15% 43.4% 197.3% Long Term Capital 15% 23.8% 66.7% Gains Page 35
  • 36. Pending Federal Tax Increases (continued) Page 36
  • 37. “Congress risks taking the economy over a ‘massive fiscal cliff,’Federal Reserve Chairman Ben Bernanke warned lawmakers onWednesday. In remarks that hit Wall Street stock prices, the central bankboss suggested the economy could hit a serious roadblock ifCongress allows the Bush tax rates and payroll tax cut to expireand $1.2 trillion in spending cuts to be implementedsimultaneously in January.” - The Hill, March 1, 2012 Page 37
  • 38. Common Theme: Tax Expenditures Page 38
  • 39. Prime TargetsTax 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 billionJoint Committee on Taxation “Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014,” December 15, 2010 Page 39
  • 40. Prime TargetsCorporate 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 billionJoint Committee on Taxation “Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014,” December 15, 2010 Page 40
  • 41. Election Outcome Page 41
  • 42. 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) Page 42
  • 43. National Electoral College Results 2012 Electoral Map 12 3 VT 3 4 3 7 10 NH 4 4 3 10 29 MA 11 3 16 RI 4 CT 7 6 20 5 NJ 14 6 18 6 20 11 DC 3 9 5 55 6 10 13 DE 3 8 MD 10 11 15 10 5 7 6 9 6 9 16 Romney Obama Barack (D) 38 8 Obama Mitt Romney (R) 29 Unknown 3 Romney HI 4 Obama 206 29 303 Romney Unknown Obama 270 votes needed to win Page 43
  • 44. National Popular Vote Results 2012 Popular Vote Map 55% 56% 55% 58% VT 67% 54% 53% NH 52% 67% 58% 52% 62% MA 61% RI 63% 69% 53% CT 57% 52% 52% NJ 58% 52% 61% 50% DE 59% 73% 57% 54%57% 51% 62% MD 61% DC 91% 60% 51% 54% 61% Obama 51% 59% 55% 67% 53% 61% 55% 55% 61% 53% National Total 59% Romney • 50% Obama 57% • 48% Romney 62% HI 72% 173 Romney Barack Obama (D) 50% 100% Mitt Romney (R) Unknown Page 44
  • 45. 2012 Presidential Election Votes by Demographic Voted for Obama Voted for Romney Women 55% 44% Gender Men 45% 52% White (non-Hispanic) 39% 59% Race Black 93% 6% Hispanic 71% 27% Non-College Graduate 51% 47% Education College Graduate 50% 48% 18 to 29 years 60% 37% 30 to 44 years 52% 45% Age 45 to 64 years 47% 51% 64+ years 44% 56% Less than $50,000 60% 38% Income $50,000 to $100,000 46% 52% $100,000 or more 44% 54%Source: Exit polls results available at http://www.cnn.com/election/2012/results/race/president#exit-polls Page 45
  • 46. 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) 53 47 Congress (includes one independent caucusing with D’s) Incoming (113th) 55 45 Congress (includes two independents expected to caucus with D’s) Page 46
  • 47. 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 240 190 (figures include 5 vacancies) Incoming (113th) Congress 232* 191* *12 seats not yet called Page 47
  • 48. How Popular is Congress? Page 48
  • 49. Real Clear Politics: 13.8% approve of howCongress is handling its job while 79.6% disapprove, Aug 5 – Sept 17 Page 49
  • 50. 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 Page 50
  • 51. What Were the Possible Game Changers Page 51
  • 52. Game Changers for 2012 Euro Zone Meltdown Iran Nuclear Activity North Korea China Economy Middle East Unrest Natural Disasters Terrorist Attack Presidential Debates Page 52
  • 53.  Fast and Furious Solyndra Bankruptcy General Services Administration – “It didn’t stay in Vegas” Cartagena - Gate Page 53
  • 54. Page 54
  • 55. Predictions Page 55