Engineering and Construction Conference: Legislative Update and Outlook for Tax Reform

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1 Engineering and Construction Conference: Legislative Update and Outlook for Tax Reform Wes Coulam & Rob Hanson September 2017

2 US Political and Legislative Landscape Page 2

3 US Government in 2017: Balance of Power 2017 Environment For first time in a decade, Trump win gives Republicans control both executive and legislative bodies of government Highly partisan environment Non-legislative distractions House, 115 th Congress 434 current members (1 vacancy) with a simple majority requiring 218 votes 240 Republicans 194 Democrats Senate, 115 th Congress 100 current members with a simple majority of 51 to pass legislation through reconciliation 52 Republicans 48 Democrats (includes 2 Independents) Page 3

4 Tax Policy Influencers House Senate Trump Administration Speaker Paul Ryan Chairman Ways & Means, Kevin Brady (R-TX) Ranking Member on Ways & Means, Richard Neal (D-MA) Tax Policy Subcommittee Chair, Peter Roskam (R-IL) Majority Leader, Mitch McConnell Chuck Schumer (D- NY), Senate s top Democrat Senate Finance Chair, Orrin Hatch (R-UT) Ranking Member on Senate Finance, Ron Wyden (D-OR) Treasury Secretary, Steven Mnuchin National Economic Council Director, Gary Cohn Assistant Treasury Secretary for Tax Policy David Kautter Commerce Secretary, Wilbur Ross Senior White House staff: Steve Bannon, Stephen Miller, Jared Kushner Page 4

5 Congressional agenda MUST-DO ITEMS Government funding National Flood Insurance Program December 8 deadline Debt limit ( extraordinary measures to be available into 2018) Sometime in 2018 FAA funding, reauthorization? Children s Health Insurance Program? OTHER PRIORITIES Tax reform, plus FY18 budget resolution for reconciliation DREAMers/Deferred Action on Childhood Arrivals Affordable Care Act market stabilization Page 5

6 Budget reconciliation Republicans don t have filibuster-proof 60 Senate votes Reconciliation allows 51-vote approval for spending, tax, debt limit bills (or combination), under 2-step process 1) Budget with reconciliation instructions passed by House, Senate Instructions direct committees to change spending or revenue numbers 2) Then, Congress must pass bills that adhere to instructions Plan for two sets of reconciliation instructions in ) FY 2017 resolution called on 4 committees to reduce deficit by not less than $1b each FY = AHCA health care bill 2) FY 2018 budget could include instructions for tax reform BUT JCT has projected that even 3-year corporate rate cut has revenue effects beyond budget window, meaning it would run afoul of reconciliation rules unless there are sufficient offsets Could budget window be extended beyond 10 years? Page 6

7 Washington timeline, agenda July 27 Big 6 Joint Statement (BAT removed) October Pass FY 18 Budget (Required to move tax reform via reconciliation) October - November W&M draft July August September October November December August 1 Democratic response (3 senators do not joint the letter) September Must-do items addressed until December Others to be temporarily addressed Additional tax reform detail expected Additional guidance on addressing burdensome regulations expected November December 2018 Committee amendments House / Senate votes Move to conference Page 7

8 Federal deficit projections: CBO vs. Trump budget Billions CBO = Current law plus 2% GDP growth Trump Budget = Significant spending cuts plus 3% GDP growth projected to result from policies for simplifying taxes, cutting regulation, building infrastructure, reforming health care, boosting domestic energy production. 1,600 1,400 1,200 1, (200) $587 $693 $563 $440 $689 $526 $775 $488 $879 $1,027 $456 $442 $1,057 $319 $1,083 $209 $1,225 $176 $1,352 $111 $1, Sources: CBO, An Update to the Budget and Economic Outlook: 2017 to 2027, June 29, 2017; OMB FY 2018 Analytical Perspectives, May 23, 2017 $(16) Page 8

9 2018 Senate elections Seats up for re-election: 23 Democrats plus 2 Independents, 9 Republicans Democrats Republicans Tammy Baldwin (D-WI) T Sherrod Brown (D-OH) T Maria Cantwell (D-WA) Ben Cardin (D-MD) Tom Carper (D-DE) Bob Casey (D-PA) T Joe Donnelly (D-IN) T Dianne Feinstein (D-CA) Kirsten Gillibrand (D-NY) Martin Heinrich (D-NM) Heidi Heitkamp (D-ND) T Mazie Hirono (D-HI) Tim Kaine (D-VA) T = Running in state won by Donald Trump in 2016 * = 2017 special election Amy Klobuchar (D-MN) Joe Manchin (D-WV) T Claire McCaskill (D-MO) T Robert Menendez (D-NJ) Chris Murphy (D-CT) Bill Nelson (D-FL) T Debbie Stabenow (D-MI) T Jon Tester (D-MT) T Elizabeth Warren (D-MA) Sheldon Whitehouse (D-RI) +2 Independents that caucus with Democrats: Angus King (I-ME) Bernie Sanders (I-VT) John Barasso (R-WY) Bob Corker (R-TN) Ted Cruz (R-TX) Deb Fischer (R-NE) Jeff Flake (R-AZ) Orrin Hatch (R-UT) Dean Heller (R-NV) Luther Strange (R-AL)* Roger Wicker (R-MS) Page 9

10 2018 House elections: GOP seats in districts that voted for Clinton Democrats would need to pick up 24 seats to regain control of the House 23 Republicans hail from districts won by Hillary Clinton in 2016 Martha McSally (R-AZ) Darrell Issa (R-CA) John Katko (R-NY) Jeff Denham (R-CA) Mike Coffman (R-CO) Ryan Costello (R-PA) David Valadao (R-CA) Carlos Curbelo (R-FL)* Pat Meehan (R-PA)* Steve Knight (R-CA) Ed Royce (R-CA) Mimi Walters (R-CA) Dana Rohrabacher (R-CA) Ileana Ros-Lehtinen (R-FL) retiring Peter Roskam (R-IL)* Kevin Yoder (R-KS) Erik Paulsen (R-MN)* Leonard Lance (R-NJ) John Culberson (R-TX) Will Hurd (R-TX) Pete Sessions (R-TX) Barbara Comstock (R-VA) Dave Reichert (R-WA)* retiring * Ways and Means Committee member Page 10

11 Members not running for re-election in 2018 Retiring Dave Reichert (R-WA) Sam Johnson (R-TX) Lynn Jenkins (R-KS) Ileana Ros-Lehtinen (R-FL) Charlie Dent (R-PA) Dave Trott (R-MI) John Duncan (R-TN) Niki Tsongas (D-MA) Running for other office Kristi Noem (R-SD), running for governor Jim Renacci (R-OH), running for governor Jacky Rosen (D-NV), running for Senate Evan Jenkins (R-WV), running for Senate Michelle Lujan Grisham (D-NM), running for governor Steve Pearce (R-NM), running for Senate Beto O Rourke (D-TX), running for Senate Lou Barletta (R-PA), running for Senate Diane Black (R-TN), running for governor Luke Messer (R-IN), running for Senate Todd Rokita (R-IN), running for Senate Raul Labrador (R-ID), running for governor Jared Polis (D-CO), running for governor Colleen Hanabusa (D-HI), running for governor Tim Walz (D-MN), running for governor Page 11

12 Understanding Tax Reform Options Page 12

13 How we got here: Major drivers of tax reform High US statutory corporate tax rate Worldwide system of taxing foreign earnings Less competitive US tax system relative to other nations Understand history current and past tax issues Inversions, repatriation, OECD BEPS, State Aid, treaties Reduce corporate and individual tax rates Promote economic growth Drive US competitiveness Page 13

14 Tax reform: overall state of play June 2016 Republican Blueprint for tax reform 20% corporate income tax rate/25% rate for business income of pass-throughs Immediate expensing but no interest expense deduction - small business exception likely Territorial system of taxing future foreign earnings Border adjustability: exempt exports from tax, deny deductions for imports - 5-year phase-in likely April 2017 Trump administration plan 15% business income rate; no position on depreciation or interest deductibility Territorial system of taxing foreign earnings, no position on border adjustability Unspecified base-broadening for corporations and individuals Senate perspectives Does not have a tax reform plan, though options being evaluated Republican Senators publicly opposed to border adjustability McConnell wants revenue neutral tax reform, Hatch not wedded to revenue neutrality Now: negotiations between House, White House, Senate on unified plan Principals: NEC Director Cohn, Treasury Secretary Mnuchin, Senate Leader McConnell, Finance Committee Chairman Hatch, Speaker Ryan, Ways and Means Committee Chairman Brady Goal -- agree on plan by September Page 14

15 Combined corporate tax rates, OECD % Source: Combined corporate income tax rate - shows the basic combined central and sub-central (statutory) corporate income tax rate given by the central government rate (less deductions) Australia Austria Belgium Canada Chile Czech Rep Denmark Estonia Finland France Germany Greece Hungary 9.00 Iceland Ireland Israel Italy Japan Korea Latvia Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Slovenia Spain Sweden Switzerland Turkey United Kingdom United States Page 15

16 What CEOs are saying about Tax Reform BRT CEO Letter to President Trump and Congressional Leaders 7 June Business Roundtable recently surveyed its membership and found that a significant majority of CEOs believe that tax reform is the single most effective action that Congress can take to accelerate economic growth over the next year. We support a fiscally responsible, modernized tax code that includes competitive business tax rates and a modern international tax system that doesn t leave trillions of investment dollars trapped overseas. We have witnessed the obstacles to past tax reform efforts for over a decade. For this reason, we provide you our commitment to put all our corporate credits and special deductions on the table. We stand ready to work with you to achieve this goal. Page 16

17 Key issues in tax reform debate International System Interest Deductibility Revenue & Political Impact Territorial (Exemption/tax free repatriation) Worldwide without deferral Border adjustments Anti-base erosion and profit shifting options (minimum tax or tax intangible income) Repatriation tax to transition to new system House Republican plan: expensing, eliminate deductibility of net interest expense Trump proposed optional expensing for manufacturers, who lose interest deductibility Is expensing worth losing interest deductions? Will reform be revenue neutral? Reconciliation could require provisions to sunset after 10 years Will Dems participate? Republicans can lose only 2 Senate votes if using reconciliation Page 17

18 Trump vs. House Blueprint: corporate Tax provision Trump April 26 Plan House GOP Top corporate tax rate 15% business rate 20% top corporate rate Cost recovery Interest expense No provision. We do think some level of expensing is important. Secretary Mnuchin No provision. Secretary Mnuchin: retaining interest deductibility is our preference AMT eliminated 100% immediate expensing for all tangible and intangible assets except land No deduction will be allowed for net interest expense Net operating losses (NOLs) (Not addressed) Carrybacks of NOLs not permitted Other business preferences Eliminate tax breaks for special interests Deduction allowed for NOL carryforward limited to 90% of net taxable amount for year determined w/o regard to carryforward NOLs allowed to be carried forward indefinitely Calls for them to generally be eliminated, except for R&D credit and LIFO Page 18

19 Trump vs. House Blueprint: international Tax provision Trump April 26 Plan House GOP Mandatory tax on previously untaxed accumulated foreign earnings regardless of whether repatriated Taxation of future foreign earnings Calls for one-time tax but rate unspecified, to be negotiated with Congress Territorial Border adjustability No provision or position Won t embrace House border adjustability plan in current form Trump likes reciprocal tax 8.75% rate for cash/cash equivalents, 3.5% rate for other earnings (e.g., Those reinvested in hard assets outside the US) Tax payable over eight year period Territorial; 100% exemption for dividends paid from foreign subs. Border adjustability with exports exempt from tax with cost of goods sold remaining deductible. All imports non-deductible. Applies to services as well as to tangible and intangible property. Emphasis is on a Made in America policy with goal of eliminating tax incentive to move operations outside the US. Page 19

20 Trump vs. House Blueprint: individual Tax provision Trump April 26 Plan House GOP Individual rates (now 10%, 15%, 25%, 28%, 33%, 35%, 39.6%) 10% 12% $0 to $75,300 25% Income levels not set 25% $75,300 to $231,450 35% 33% $231,450+ Individual AMT Repealed Repealed Capital gains and dividends 3.8% Net Investment Income Tax (NIIT) Current law rates: 0% 15%, and 20% Repealed 50% deduction for capital gains, dividends, interest; rates of: 6% 12.5%, and 16.5% Proposed to be repealed under health reform bill Top pass-through rate 15% business tax rate 25% rate on business income Carried interest Not addressed, but WH Chief of Staff Priebus said, The President wants to get rid of carried interest. (Not addressed) Estate tax Repealed Repealed Page 20

21 Tax reform process 1 Outline to be released Outline reflecting a consensus of Big Six negotiators will be released the week of September 25 2 Ways and Means Committee A chairman s mark release is targeted for mid-october, after House passes budget resolution 3 House floor consideration A successful Ways & Means vote would send the bill to the floor 4 Senate Finance Committee Chairman Hatch: Committee will draft and report tax reform legislation as main priority this fall 5 Senate floor Finance approval would lead to floor consideration and amendments prior to a full Senate vote 6 Conference, signature The House and Senate must agree to (and pass) a final version, then President signs Page 21

22 Tax reform menu Scope Money Business and individual Business only International only Revenue neutral Tax cut Politics Revenue ideas GOP bill, reconciliation Bipartisan, no reconciliation Border adjustability Anti-base erosion provisions Limit interest deductibility Duration Cost recovery Permanent Temporary 50% bonus depreciation 100% expensing Depreciation changes Page 22

23 Joint Statement on Tax Reform July 27 What it calls for Reducing tax rates as much as possible tax relief for American families lower tax rate for small businesses so they can compete with larger ones lower rates for all American businesses so they can compete with foreign ones Unprecedented capital expensing Priority on permanence Encouraging US companies to bring back jobs and profits from overseas To be accomplished by Ways & Means and Finance committees developing and drafting legislation Moving legislation through tax committees this fall, under regular order Followed by consideration on the House and Senate floors Hopefully with participation from Democrats Not addressed Rate targets Interest deductibility Extent to which the tax reform plan should be paid for, and how Page 23

24 Hatch corporate integration proposal Finance Chairman Hatch crafting discussion draft designed to partially integrate the corporate and individual tax systems Could be incorporated into broader tax reform plan Reduce or eliminate double taxation through establishment of a corporate dividendspaid deduction (DPD) International tax regime likely unchanged Corporation withholds 35% tax on gross amount of all dividends Withheld amount would be a nonrefundable credit for the shareholder 20% preferential rate for qualified dividends would be repealed Corporation withholds 35% tax on the gross amount of interest paid to creditors Policy rationale Narrow tax treatment gap between C corps and pass-throughs Create some incentive to repatriate foreign earnings Eliminate tax code bias in favor of debt Withholding tax on interest viewed as curbing earnings stripping Page 24

25 Partnership taxation Proposed rates Definition of business income Potential for abuse Trump Pass-through rate: 15% business tax rate Top individual rate: 35% House Republicans Pass-through rate: 25% for the active business income of sole proprietorships and passthrough entities Top individual rate: 33% What should be taxed as business income and what should be taxed as wages/ordinary income? What is considered reasonable compensation? One suggested approach: taxing 70% of all pass-through income as wages, 30% as business profits Secretary Mnuchin, May 25: We will absolutely make sure that rich people cannot use this as a loophole where they should be paying 35 percent taxes on wages and that they pay 15 percent instead. I assure you that that will be in the code and we will have very clear ways to enforce that. Page 25

26 Regulatory review April 21: Trump executive order requires review of significant tax regulations issued after January 1, 2016 July 7: Notice identifies 8 specific regulations as unduly burdensome or complex 1) Proposed Regulations under Section 103 on Definition of Political Subdivision (REG ) 2) Temporary Regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) (T.D. 9770) 3) Final Regulations under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons Interview (T.D. 9778) 4) Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation- Skipping Transfer Taxes (REG ) 5) Temporary Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities (T.D. 9788) 6) Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness (T.D. 9790) 7) Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit (T.D. 9794) 8) Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations (T.D. 9803) By August 7: comments were due on whether the regulations should be rescinded or modified, and how they should be modified By September 18: final report to the President recommending specific actions July 28: Notice delayed the application of the Documentation Regulations under final and temporary regulations (T.D. 9790) under Section 385 by one year Page 26

27 2017 OECD guidance In 2017, the OECD released guidance on several focus areas including: July , the OECD released the draft contents of the next update to the OECD Model Tax Convention July , the OECD released the 2017 edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations April , the OECD released an updated version of the Guidance on the Implementation of Country-by- Country Reporting February , the OECD released BEPS Action 13 on Country-by-Country Reporting Peer Review Documents providing the approach taken regarding the peer review process, the sources required to be submitted to the OECD, and the timing for each phase of the process January , the OECD released a public discussion draft for comment that includes three draft examples with respect to treaty entitlement of non-collective investment vehicle (non-civ) funds Page 27

28 Infrastructure Trump advisors have encouraged private sector P3 investment, regulatory reform, and divesting FAA s air traffic control system The Administration s FY 2018 budget proposal calls for $200 billion in federal infrastructure spending spread over ten fiscal years, but provides no further details about the $1 trillion package The budget also proposed to reduce funding for existing transit and highway project grant programs, cutting the Department of Transportation s budget by 13% in FY 2018 and slashing HTF spending by $95 billion over 10 years GOP congressional leaders and the White House have prioritized tax reform in 2017, with no link to infrastructure Previous proposals used revenue from repatriation for infrastructure funding; could attract support of Democrats Privatization of FAA air traffic control is priority for House, but Senate unlikely to go along Appropriators, on bipartisan basis, likely to reject Administration s proposed infrastructure cuts Infrastructure could still emerge as a pre-election priority in 2018 Page 28

29 Tax reform: take away points Focus on Key Elements of Change Lower US corporate and individual tax rates International system - Territorial, destination-based Repatriation tax What deductions and credits will be repealed? Details matter Reset on process due to events around healthcare bill Transition period on all major policy changes When and how likely is Tax Reform? Unified Republican government/budget reconciliation rules create a path forward but challenges remain President Trump courting Democrats on tax reform Expect action during calendar year 2017, could continue into 2018 Details remain fluid (size and scope may vary) Page 29

30 Questions? Page 30