Legislative and regulatory update

Transcription

1 Legislative and regulatory update Amy Jensen Cunniffe and Heather Meade Washington Council Ernst & Young

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2015 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Presenters Amy Jensen Cunniffe Washington Council Ernst & Young Washington, DC Heather Meade Washington Council Ernst & Young Washington, DC Mark Rountree Ernst & Young LLP Dallas, TX Page 3

4 Political landscape Page 4

5 Congressional profile, 114th Congress Senate makeup, 114th Congress House makeup, 114th Congress 54 / 46* 246* / 188 Republicans Democrats Republicans Democrats * Includes 2 independents *One vacancy: Boehner (R-OH) Senate leadership in 114th Congress Majority Leader: Mitch McConnell (R-KY) Majority Whip: John Cornyn (R-TX) Republican Conference Chair: John Thune (R-SD) Democratic Leader: Harry Reid (D-NV) Democratic Whip: Dick Durbin (D-IL) Democratic Conference Vice Chair: Chuck Schumer (D-NY) Strategic policy adviser to the Democratic Policy and Communications Center (DPCC): Elizabeth Warren (D-MA) House leadership in 114th Congress Speaker: Paul Ryan (R-WI), elected October 29 Majority Leader: Kevin McCarthy (R-CA) Majority Whip: Steve Scalise (R-LA) Democratic Leader: Nancy Pelosi (D-CA) Democratic Whip: Steny Hoyer (D-MD) Asst. Democratic Leader: James Clyburn (D-SC) Page 5

6 2016 elections Presidential Iowa caucuses set for February 1 New Hampshire primary on February 9 Each party s nominee could be known by April 1, 2016 House At 247 seats, largest Republican majority in House since 1930 Democrats may pick up seats in presidential election year Senate Currently 54 Republicans, 46 Democrats (includes 2 independents) 24 Republican, 10 Democratic seats up for re-election in 2016 Page 6

7 2016 presidential candidates Hillary Clinton, former First Lady, senator (NY), Secretary of State Bernie Sanders, senator (I-VT) Martin O Malley, former Baltimore Mayor, Maryland Governor Dates Republican National Convention: July 18 21, 2016, in Cleveland Democratic National Convention: July 25 28, 2016, in Philadelphia Election Day: Nov. 8, 2016 Jeb Bush, former governor (FL) Ben Carson, former neurosurgeon Chris Christie, governor (NJ) Ted Cruz, senator (TX) Carly Fiorina, former HP CEO Jim Gilmore, former governor (VA) Lindsey Graham, senator (SC) Mike Huckabee, former AR governor John Kasich, governor (OH) George Pataki, former governor (NY) Rand Paul, senator (KY) Marco Rubio, senator (FL) Rick Santorum, former senator (PA) Donald Trump, real estate mogul Page 7

8 2015 Excitement! Page 8

9 Legislative deadlines and agenda December 11 December 4 Expiration of: Highway spending authorization expires Funding hovering around safe level of $4 billion Government funding (legislation is necessary to appropriate spending under caps set by Bipartisan Budget Act) Internet tax ban Agenda items Highway spending/funding Tax extenders Appropriations bill to fund government under new spending caps 9/11 responders Page 9 December 31 Tax extenders will have been expired for one year Customs bill Internet tax ban/online sales tax Affordable Care Act changes Multi-employer Syrian refugees

10 The deficit Page 10

11 Federal budget deficit $439 billion for FY2015 Stays below $500 billion until FY2019 Projected to increase above $1 trillion in 2025 Totals $7.2 trillion for FY Federal budget surplus/deficit, Percentage of gross domestic product (GDP) Average deficit, 1965 to 2014 (-2.7%) Actual Projected Source: CBO Updated Budget Projections, 3/10/15 Page 11

12 Sources and uses of federal revenues, FY2015 Revenues Expenditures Excise taxes, 3.0% Other, 6.0% Other entitlements, 6.6% Net interest, 6.1% Corporate income taxes, 10.7% Non-defense discretionary, 5.6% Social Security, 24.1% Individual income taxes, 47.4% Income security, 13.8% Social Security, 33.0% Defense, 16.0% Medicare and health, 27.9% Total: $3.2 trillion Total: $3.7 trillion Note: Other revenue includes Federal Reserve earnings, customs duties, estate and gift taxes, and other miscellaneous receipts. Other entitlements includes commerce and housing credit, education, training, employment, social services, and veterans benefits and services. Non-defense discretionary includes international affairs, general science, space and technology, energy, natural resources and environment, agriculture, transportation, community and regional development, administration of justice, general government, and undistributed offsetting receipts. Income security includes items such as food stamps, public housing and non-veterans pensions. Source: Monthly Treasury Statement (September 2015). Page 12

13 Upcoming legislative agenda Limited agenda Tax reform Page 13

14 Tax outlook Page 14

15 Tax outlook Tax extenders roughly 50 provisions expired Dec. 31, Senate Finance passed two-year bill through House approved permanent extension of major provisions. White House wants earned income tax credit (EITC), child tax credit expansions that expire after 2017 made permanent. Ultimate resolution is unclear. Tax reform latest efforts are focused on international changes. House highway bill proceeding without funding from international reform, though international tax talks continue. Speaker Ryan hopes for international tax reform in Business, individual tax reform seen no earlier than Revenue needs non-reform tax provisions in demand. Miscellaneous tax offsets are used to pay for increased spending caps under budget deal and funding in long-term highway bill. Page 15

16 Tax reform: latest developments The focus had been on international tax reform, with deemed repatriation eyed for highway funding. Prior to being elected Speaker, then-ways and Means Chairman Ryan announced that international tax reform would not come together in time to fund highway bill. New Ways and Means Chairman Brady set to pursue tax reform, but says it may wait until Speaker Ryan said that he hopes international tax reform can get done in Particularly in light of companies moving overseas and foreign takeovers of US companies Page 16

17 Inversions Inversions, in which US companies combine with foreign entities in a more favorable tax jurisdiction, raise concerns about the competitiveness of the US tax system. High corporate tax rate, worldwide system seen as main culprits For example, Pfizer deal to acquire Allergan and base company in Ireland Republicans say tax reform is the only remedy. Democrats are supportive of Treasury regulations and call for targeted legislation to prevent inversion transactions. Treasury Notice (Nov. 19, 2015 ) addresses: Basing a combined corporation in a third country Inflating the new foreign parent corporation s size Requiring the new foreign parent to be a tax resident of the country where the foreign parent is created or organized Page 17

18 Health outlook Page 18

19 Bipartisan Budget Act of 2015 health details Health provisions Prevents spike in Medicare Part B premiums that would have resulted from no Social Security cost of living adjustment (COLA) Extends for an extra year (2025) the 2% reduction in Medicare provider plan payments Repeals requirement that employers with more than 200 full-time employees automatically enroll employees who fail to choose or decline coverage Page 19

20 Other health issues in 2016 Senate Finance Committee Chronic Care Legislation House Energy & Commerce Committee Medicaid Reform Task Force US Food and Drug Administration (FDA)/industry negotiations over user fee agreements and related items House 21 st Century Cures Legislation Senate Innovation for Healthier Americans Act Drug pricing issues FDA staffing dollars National Institutes of Health (NIH) research dollars Scope of agreement Page 20

21 New Ways and Means Chairman Kevin Brady (R-TX) Health agenda Medicare reform package Pent-up demand member wish lists Hospital reforms Site-neutral payments included in 2015 budget deal Sets the stage for combining Parts A & B in Medicare Appetite for more hospital reform in 2016 Indirect medical information (IME) reforms Medicaid Disproportionate Share Hospital (DSH) subsidy recapture Attempt to level the playing field for non-expansion states Page 21

22 40% excise tax on health benefits Page 22

23 The 40% tax on benefits by the numbers 2018: year the tax takes effect 40%: non-deductible excise tax assessed on the value of employersponsored health coverage above certain benefit thresholds $10,200/$27,500: initial benefit thresholds for self-only coverage and family coverage in 2018 (with limited adjustments) 49%: the number of large employers in a recent poll with at least one plan that will hit the thresholds in 2018 $87 billion: revenue Congressional Budget Office (CBO) projects the 40% tax on benefits will generate through %: percent of revenue from the 40% tax on benefits projected to come from excise tax receipts through million: the number of Americans with employer-sponsored coverage Page 23

24 Example: how the cost of applicable coverage adds up $30,000 Total: $25,900 $300 Pre-tax critical illness plan $25,000 $20,000 $2,000 $1,800 $400 $800 Onsite medical clinics Limited-purpose flexible spending account (FSA) $15,000 $10,000 $15,443 Pre-tax employee contribution to health savings account (HSA) Employer contribution to HSA Employer contribution for medical insurance $5,000 $5,148 Employee premium for medical insurance $0 Family coverage in 2015 Note: Total premiums for medical insurance shown in example are set at the 75 th -percentile level nationally. Employee share is assumed to be 25%. Source: Medical Expenditure Panel Survey - Insurance Component, Agency for Healthcare Research and Quality (AHRQ), Growth to 2015 based on growth rates in National Health Expenditures, CMS Office of the Actuary, Page 24

25 Nearly 25% of employer-sponsored plans estimated to exceed tax in 2018 have low actuarial values (AVs) Distribution of actuarial values (AV) of plans offered by large employers that will exceed tax threshold by 2018 Distribution of actuarial values (AV) of plans offered by large employers that will not exceed tax threshold by 2018 AV below 70% AV below 70% AV of 70%-79% 7% AV of 90%+ 8% AV of 90%+ AV of 70%-79% 18% 15% 62% 15% 31% 15% 23% 48% 59% AV of 80%-89% AV of 80%-89% A third of large employers (33%) are estimated to have plans that will exceed excise tax threshold in 2018 (based on their 2014 medical plan premiums for the employer s highestcost or only plan, trended forward at 6%). Source: Mercer s National Survey of Employer-Sponsored Health Plans, 2014 Page 25

26 Appendix Page 26

27 Presidential candidates tax plans business highlights Top corporate tax rate (now 35%) Top passthrough rate (now 39.6%) Taxation of future foreign earnings (now worldwide) Mandatory tax on untaxed accumulated foreign earnings Capital cost recovery (now Modified Accelerated Cost Recovery System (MACRS)) Bush Trump Rubio Clinton Sanders Kasich Christie Carson Cruz Paul 20% 15% 25% Reform our tax code to reward businesses that invest in Demanding that the wealthy and large 28% 15% 25% corporations 25% -- workers and production here in pay their fair share in taxes will Territorial, Immediate Territorial, America, stop Territorial, no residual worldwide no residual rather than corporations no residual US tax on taxation, tax on US shifting jobs from shifting tax on US active repeal of active and their profits active foreign deferral foreign investments and jobs foreign earnings earnings overseas overseas to earnings avoid paying Up to 8.75% Full expensing for new investment 25% 25% Flat tax of 10% to 15% Territorial, no residual tax on US active foreign earnings 16% business flat tax Territorial, no residual tax on US active foreign earnings U.S. income 10% 6% taxes. low rate 8.75% 10% Full expensing for new investment Full expensing for new investment Full expensing for new investment Full expensing for business equipment 14.5% businessactivity tax on all companies Only taxes consumption in US, effectively making it a territorial tax system Full expensing for new investment Page 27

28 Presidential candidates tax plans individual highlights Individual tax rates Top capital gains and dividends rate (now 23.8%) Carried interest Bush Trump Rubio Clinton Sanders Kasich Christie Carson Cruz Paul 10%, 25%, 10%, 28% 20%, 25% 20% (3.8% net investment tax enacted with the Affordable Care Act repealed) Taxed as ordinary income 15% for individuals in the 20% income tax bracket; 20% for individuals in the 25% income tax bracket Taxed as ordinary income 15%, 35% Provide tax relief to working families and small Demandin g that the wealthy and large corps pay Three rates: top no higher than 28%, two other 0% business their fair share in taxes. rates unspecified 15% digit Unclear Unclear Taxed as ordinary income Taxed as ordinary income Unclear Three rates: top no higher than 28% and bottom a single Unclear Flat tax of 10% to 15% No taxes on first $36,000 of income, 10% flat tax on all individual income above that from wages and investment 14.5% flat tax on all personal income, including wages, salaries, dividends, capital gains, rents and interest; first $50,000 of income for a family of four would not be taxed Deductions Limit deductions for other than charitable to 2% of adjusted gross income (AGI) Value phasedout by income tax bracket Only retain charitable, mortgage interest End tax loopholes for the wealthy Effort to simplify deductions Eliminate enough to make plan revenueneutral Have to get rid of all the deductions and all the loopholes Retain charitable, mortgage interest (up to $500k); rest unclear Only retain charitable, mortgage interest; others eliminated Page 28

29 Top individual tax expenditures: FY Employer-provided health care exclusion Defined contribution/defined benefit pension plans Reduced tax rates on dividends and capital gains Mortgage interest deduction Earned income credit Exclusion of Medicare benefits Tax credits for participation in exchanges State and local tax deductions Child tax credit Deduction for charitable contributions Exclusion of untaxed Social Security benefits Exclusion for cafeteria plan benefits Deduction for property taxes Tax-exempt state/local bond interest Exclusion of capital gains at death Exclusion of interest, life insurance/annuity contracts Source: Joint Committee on Taxation JCX-97-14, Aug. 5, 2014 $ billions Page 29

30 Example: adding in all applicable coverage costs may lead to earlier and larger tax liabilities $70,000 Projected total applicable coverage costs versus excise tax thresholds Family plan $60,000 $50,000 40% excise tax applies $40,000 $30,000 Family plan excise tax threshold $20,000 $25,900 $27,500 Single plan $10,000 $8,400 $10,200 Single plan excise tax threshold $ Source: Health cost growth based on Centers for Medicare and Medicaid Services (CMS) Office of Actuary National Health Expenditure projection; general price inflation based on Congressional Budget Office forecast. Page 30

31 The excise tax will also hit sooner and harder in certain states Projected average total base medical premium in 2025 as a percent of projected excise tax threshold Hawaii Alaska 90% or more 85%-89% 80%-84% Less than 80% Source: Ernst & Young LLP projections based on premiums from Medical Expenditure Panel Survey-Insurance Component (AHRQ), Health premium growth rates based on CMS Office of Actuary forecast and general price inflation based on Congressional Budget Office forecast. Page 31

32 Questions? Page 32

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