Tax Reform – Legislative Update

David Bridges - Edison Electric Institute

AGA - EEI Accounting Leadership & Chief Audit Executives Conference - June 26, 2017

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Political Landscape – Jan. to Present

Trump tweets….

Cabinet Nominations

Supreme Nomination - Gorsuch

Inauguration

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Political Landscape – Jan. to Present ….(cont.)

Trump Fires

Comey

Trump tweets….Government Funding Bill Passes

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Political Landscape – Jan. to Present ….(cont.)

Trump Pulls Out of Paris Accord

Trump tweets….

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Political Landscape – Jan. to Present ….(cont.)

ComeyTestifies to Senate

Intel Comm.

Trump tweets….Senate set to take up Healthcare before July 4

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Congress Again Driven By Deadlines/Cliffs

oDebt Ceiling – Sept./Oct. ????o 2017 Budget Reconciliation – Sept. 30th

o SCHIP oGovernment Funding – Sept. 30th

o Sequester – Sept. 30th

o FAA Reauthorization, FDA User Fees, Flood Insurance Program – Sept. 30th

o FISA (Foreign Surveillance Authority), Extenders & ACA Taxes – Dec. 31

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Tax Reform Act (TRA) of 1986 - 1986 was the quintessential "lower the rates and broaden the base" legislation. o Dropped the top corporate tax rate from 46% to 34%, while eliminating numerous tax

incentives o Lowered the top individual income tax rate from 50% to 28% while taxing capital gains

and dividends as ordinary income o President Reagan's Treasury Department was heavily involved throughout the process

and worked closely with House Ways & Means and Senate Finance Committees

Camp Draft - In 2014, then Ways & Means Chairman Dave Camp released the most extensive tax reform draft in years. It contained:o Corporate tax rate cut to 25%o Retained deductibility of interest on corporate debto Repealed corporate Alternative Minimum Tax (AMT)o Eliminated “accelerated depreciation” (system known as MACRS)o Repealed all energy tax creditso Individual tax rates set at 10% and 25% (with a 10% surtax on incomes over

$400,000/$450,000)o Taxed dividend and capital gains as ordinary income with a 40% exclusion, meaning a

maximum rate of 21%

Tax Reform – How did we get here?

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The PATH Act of 2015 – On December 18, 2015, Congress passed a $670 billion tax package that: o Made over 20 temporary provisions permanent including the R&D credit,

Sec. 179 expensing, state & local tax deduction, several charitable provisions, S-Corp. provisions, American Opportunity Tax Credit, as well as enhancements to the Earned Income and Child Tax Credits

o 5-yr extension of bonus depreciation (phased down from 50% to 30% over that period), New Markets Tax Credit, and Work Opportunity Tax Credit

o 2-yr extension of 30 other expired provisions through the end of 2016, including a number of energy provisions

o 5-yr extension and phase-down of the Wind Production Tax Credito 5-yr extension and phase-down of the 30% Solar Investment Tax Credit o 2-yr delay of the Cadillac Tax and the ability to deduct the tax as an

expense

Tax Reform – How did we get here?

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Election Results/Key Playerso Republicans control White House, House and the Senateo Tax reform is an economic driver for President Trump and Speaker Ryano Key Democratic players are in place such as Senator Chuck Schumer (D-NY),

Senator Ron Wyden (D-OR) and Congressman Richard Neal (D-MA) Dynamic Scoring

o Under dynamic scoring, proposed tax provisions will be scored using the “true” economic impact of tax policy changes (long-term effects of taxpayer response)

o By taking this into account, tax writers can be more aggressive with their approaches

Push for Growth o Recent attention within tax-writing committees is more about economic

growth and less about “broadening the tax base, lowering the rates”o Goal is to push investment

Push to be “BOLD”

Tax Reform – How did we get here??

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The House GOP’s Tax Reform “Blueprint” was released on June, 24, 2016, and includes the following items:

o Business Tax Reform− Corporate tax rate of 20%− Pass-through (e.g., Partnerships, LLC, etc.) tax rate of 25%− 100% full expensing of both tangible and intangible property− Deductibility of net interest would be eliminated− Net operating losses can be carried forward indefinitely and will be increased by an interest factor− Territorial system, with no base erosion provisions− Tax base would be border adjustable (i.e., tax imposed on value of imports; exports would not be

subject to tax)− LIFO, R&D credit and low-income housing tax credit would be retained. Eliminates all other unspecified

“special interest deductions and credits”

o Individual Tax Reform− Consolidates the five current tax brackets into three individual tax brackets: 12%, 25%, and 33%− 50% exclusion for capital gains, dividends and interest income (i.e., effective rates 6%, 12.5%, and

16.5%)− Individual AMT and estate tax would be eliminated

Tax Reform Proposals –The House GOP Blueprint

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Tax Reform Proposals –The Trump Plan

Highlights:

• April 26th Press Conference by Treasury Secretary Mnuchin and NEC Director Cohn

• Business Reform laid out in 4 bullets – 15% Rate, Territorial System, Repatriation and Eliminate tax breaks for special interests.

• No mention of the BAT, interest deductibility or expensing.

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Tax Reform Proposal – The Senate

Interest Haircut?

Border Adjustment Tax?

Corporate Rates?

Corporate Integration?

Simple Tax Cut?

Expensing?

Reagan/Camp Draft Style of Reform?

Thin Cap Rules?

Senator Hatch Announces Informal Tax Reform Working Group:

o Sen. Portman (OH)o Sen. Toomey (PA)o Sen. Scott (SC)o Sen. Thune (SD)

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Tax Reform Landscape – Where things stand….

“CONSENSUS”

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Interest Deductibility/100% Expensingo Any substantial change to the deductibility of interest on corporate

debt would impact the ability of electric companies to access lower-cost capital. Raising the cost of capital, along with the added tax liability, would negatively impact customers by making it more expensive to produce and deliver energy.

o A potential compromise would be to continue allowing electric companies the ability to deduct interest but to forgo utilizing 100-percent expensing. It is important to note that this potential compromise is expected to be revenue-neutral and may even be a revenue raiser.

State & Local Tax Deductions o Electric companies are typically the largest payer of property taxes in

every state because of the capital-intensive nature of their energy infrastructure. It is critically important for our industry to maintain the ability to deduct state and local property taxes.

EEI Tax Reform Priorities/Principles

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Normalization/Excess Deferred Taxeso To the extent accelerated depreciation, including 100 percent

expensing, is retained in tax reform, tax normalization must be maintained.

o As in 1986, any reduction in the corporate tax rate must also provide for the normalization treatment for excess deferred taxes created by the reduction.

Maintain Parity between Dividend and Capital Gains Tax Rateso It is critical to maintain parity with respect to the tax rate for

dividends and capital gains. Otherwise, the tax code would arbitrarily advantage non-dividend paying stocks over stocks that pay dividends.

EEI Tax Reform Priorities/Principles (cont.)

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Transition Ruleso Appropriate transition rules must accompany significant tax law

changes. Our industry has made substantial investments in existing property and has made significant commitments toward new investment projects in reliance on the current tax rules. Tax reform should retain the current tax treatment for these investments.

EEI Tax Reform Priorities/Principles (cont.)

EEI – What are we doing?

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EEI

Industry Coord.

Advocacy & Lobby Pieces

Messaging

Comm.’s

“535” PlanWash. Rep. 101’s

Tax Reform Subcomm

Executive Fly-Ins

TARS

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Tax Reform – Where do we go from here????

House:• Ways and Means has held two

tax reform hearings so far this summer. Expect more.

• Potential release of draft and committee mark up in Sept.

• House Passage Sept./Oct.

Senate:• Wait and see approach with

House• Healthcare in Summer/Taxes in

Fall• Expect Senate to release and

move something late Fall –Oct./Nov.

Trump Administration:• Administration is taking the reins• “Listening Sessions” and continued

behind the scenes discussions with Congress

• May see additional details on Trump plan after the August Congressional Recess (Rates)

• Will cut the deal

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Tax Reform – When does it get done????

The Optimist: Fall/Winter of 2017

The Pessimist: Never

The Realist: First Quarter of 2018

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Tax Reform – What does it look like at the end????

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Questions?

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