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  • 1. Tax and Budget Policy in the Washington Swamp as We Approach Another Election Year Bank Tax Institute Orlando, FL November 14, 2013 Kenneth J. Kies Managing Director Federal Policy Group
  • 2. View from Washington Page 2
  • 3. 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 Page 3
  • 4. The Outlook for 2013 Federal Fiscal Outlook Page 4
  • 5. Deficit Outlook Under CBO $1,800 $1,600 Annual Deficit ($ billion) $1,400 $1,200 $1,413 $1,294 $1,300 $1,087 $1,000 $800 $600 $400 $642 $648 $560 $378 $432 $482 $733 $782 $542 $200 $0 Fiscal Year CBO Baseline Source: CBO Baseline Budget Outlook, May, 2013 Page 5
  • 6. Federal Debt Outlook: White House Total Federal Debt $23.4 $22.6 $21.8 $20.9 $20.0 $20 $19.1 $18.1 $17.0 Publicly Held Debt ($ Trillions) $16.1 $15 $10 $5 $0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Fiscal Year Source: White House Updated Budget for Fiscal Year 2014, July 2013 Page 6
  • 7. Federal Debt Outlook: White House Total Federal Debt (As % of GDP) 120% 106% 107% 107% 2013 2014 2015 107% 106% 105% 104% 104% 103% 2018 2019 2020 2021 100% 80% 60% 40% 20% 0% 2016 2017 Fiscal Year Source: White House Updated Budget for Fiscal Year 2014, July 2013 Page 7
  • 8. Debt to GDP Ratio is Likely Worse White House Projections on GDP Growth are More Optimistic than other Government Projections Projected GDP 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% Page 8
  • 9. Now Even Worse News Page 9
  • 10. Entitlements Drive the Debt Higher Page 10
  • 11. 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% Page 11
  • 12. 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 Source: CBO Baseline Budget Outlook, May, 2013 Page 12
  • 13. The Interest Rate Time Bomb Federal Net Interest Expense 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 Fed Spending (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-year Treas Notes 2.1 2.7 3.5 4.3 5.0 5.2 5.2 5.2 5.2 5.2 5.2 Source: CBO Baseline Budget Outlook, May, 2013 Page 13
  • 14. 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 Page 14
  • 15. Detroit: The Mother of all Pension Problems Page 15
  • 16. 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 Page 16
  • 17. A Crisis Among Our Young People Page 17
  • 18. “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’Connor September 9. 2013 Page 18
  • 19. “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 Page 19
  • 20. 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-yearolds voted. 2012 National Assessment of Education Progress Civics Report Card to the Nation Page 20
  • 21. Looming Deadlines Page 21
  • 22. Looming Deadlines  December 13, 2013 – Budget Conference Deadline  January 15, 2014 – Continuing Resolution Expires  February 7, 2014 – Debt Ceiling Page 22
  • 23. How is Obamacare doing? Page 23
  • 24. On to the 2014 Election Page 24
  • 25. 2014 Election: Rothenberg Report Category Senators Pure 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 Page 25
  • 26. Outlook for Tax Reform in 2013 – Is More Redistribution Needed? Page 26
  • 27. The Tax Code Has Become More Progressive Year Income Class % of Total AGI % of Total Income Tax Paid 2010 Top 1% 18.9% 37.4% Bottom 50% 11.7% 2.4% Top 1% 22.86% 39.81% Bottom 50% 12.19% 3.36% Top 1% 20.81% 37.42% Bottom 50% 12.99% 3.91% Top 1% 14% 25.13% Bottom 50% 15.03% 5.81% Top 1% 8.46% 19.05% Bottom 50% 17.68% 7.05% 2007 2000 1990 1980 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 Page 27
  • 28. 2012 Income Tax Liability for Individuals Income Class Total Tax Liability Total Returns Filed Average Tax Liability Per Return $30,000 and Below ($46.8 Billion) 53 Million $0 $30,001 $200,000 $425.2 Billion 95.7 Million $4,473 $200,001 and 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 Page 28
  • 29. 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 Page 29
  • 30. Tax Expenditures benefit more than the “Rich” 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 Source: Joint Committee on Taxation , Estimate Of Federal Tax Expenditures For Fiscal Years 2012-2017, February 1, 2013 Page 30
  • 31. Tax Rates for California and New York City State Top 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% Page 31
  • 32. Selected Federal Means-Tested Programs and Refundable Tax Credits Outlay for the Federal Government 1972 (2012 Dollars) 1991 (2012 Dollars) 2011 (2012 Dollars) Earned Income Tax Credit Amount Spent* % of all Tax Filers 0 0 $8 Billion 7.6% $55 Billion 17.7% Child Tax Credit Amount Spent* % of all Tax Filers 0 0 0 0 $28 Billion 14.7% Supplemental Security Income Amount Spent % of all U.S. Residents 0 0 $23 Billion 1.8% $49 Billion 2.5% AFDC/TANF Amount Spent % of all U.S. Residents $18 Billion ** $20 Billion ** $18 Billion ** SNAP (Food Stamps) Amount Spent % of all US Residents $9 Billion 5.3% (11.1 million) $31 Billion 8.9% (22.6 million) $79 Billion 14.3% (44.7 million) Housing Assistance Amount Spent % of all Households $5 Billion 2.1% $26 Billion 4.1% $39 Billion 3.7% 0 0 $8 Billion 1.3% $36 Billion 3.0% Pell Grants Amount Spent % of US Residents 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 Page 32
  • 33. The Outlook for 2013 Tax Reform Predictions Page 33