1. Presentation for the National Association of State Treasurers July 12, 2016 Established. Informed. Engaged. 2016 House GOP Tax Reform Blueprint

2. Overview On June 24, 2016 House Republicans released what was labeled a “bold Blueprint for pro-growth, comprehensive tax reform” that includes: Eliminating nearly all itemized deductions and most credits; Maintaining but likely changing the mortgage interest and charitable deductions; Limits to most business tax incentives, including eliminating the deduction for net interest expense While the 35 page Blueprint offers a comprehensive overview of the proposed reforms, it lacks specific details regarding a number of provisions including most that would be eliminated/changed. Commentary - The Blueprint is both a policy and a political document written with the upcoming election in mind, which is why we surmise it does not include all the negative details of which incentives would be limited or eliminated. Established. Informed. Engaged.

3. Income Tax Rates Three tax brackets: 33%, 25%, 12% Deductions Eliminate almost all itemized deductions, make changes to mortgage interest and charitable deductions Expand the standard deduction by consolidating with personal exemptions Reduce from roughly 33% to 5% the number of taxpayers itemizing Continue exclusions for health care and retirement saving with possible options for “effective and efficient” policy in the two areas Credits Expand child tax credit, maintain and reform the EITC (reduce fraud) Simplify education tax benefits (discusses having a savings benefit like 529 plans and a benefit targeting middle and lower income taxpayers like the American Opportunity Tax Credit) Eliminate other credits (unspecified) Specifically assumes the repeal of all “Obamacare” taxes including the medical device and health insurance tax, the 3.8% net investment surtax and the 0.9% Medicare surtax. Individual Established. Informed. Engaged.

4. Exclusions Continue tax incentives for retirement savings and employer provided health care, possible reforms Consolidate the five tax deductions and credits to two simpler benefits: a larger standard deduction and an enhanced child and dependent tax credit Alternative Minimum Tax Repeal Capital Gains, Dividends and Interest Income Income subject to a 50% exclusion, translating to an effective 6%/12.5% and 16.5% rate on that income, depending on the bracket of the individual Down from current top rate of 23.8% Commentary – inclusion of interest income reflects new policy on that type of income Estate TaxEliminate Estate Tax Individual (cont.) Established. Informed. Engaged.

5. Tax RateLower corporate tax rate to 20% Passthrough Business Income Maximum rate of 25% Deductions and Credits Eliminate “special interest” deductions and credits to lower the rate (not specified which, generally) Deductions and Credits: R&D Credit Retain Deductions and Credits: Domestic Prod. (IRC §199) Repeal (offered as an example of an incentive that would be repealed) Corporate/Business Tax Established. Informed. Engaged.

6. Depreciation Full expensing in year one of all assets, tangible and intangible; but does not include land Accounting Methods Retain LIFO, with W&M evaluating ways to make inventory accounting “more efficient” No specific mention of LCM or cash methods Interest Expense Businesses can deduct interest expense against any interest income, but cannot deduct net interest expense. They can carry forward any net interest expense indefinitely and use it as a deduction against future net interest income. The Committee will develop special rules for financial sector like banks and insurance companies Corporate AMTRepeal NOLsUnlimited carryforward, with inflationary adjustment Corporate/Business Tax (cont.)

7. International Income Territorial tax system (100% exclusion for foreign income) Repatriation One-time 8.75% tax on cash assets previously earned overseas; 3.5% tax on foreign earnings invested abroad (assets etc.) Border Adjustability Would be border adjustable like VATs, rebate implicit tax on exports and burden remains on imports Base Erosion Prevention Repeal Subpart F rules (passive income rules), retain personal holding company rules International Established. Informed. Engaged.

8. Municipal Bonds Include language on individual exclusions and deductions, noting the general rule will be that all compensation related to employment will be in the tax base. Specifically notes for “two pressing national priorities” the exclusions for employer-provided health care and retirement – exception would be made. Commentary – The “Camp” tax reform proposal named for then-Chairman Camp created a new 10% surtax (on top of the 25% rate bracket) that included otherwise excluded income like municipal bond income, employer provided health care benefits and retirement contributions. 529 Plans Discussed in education incentive reform, specifically cited 529 plans as a model for a reformed savings vehicle for college and vocational training programs (along with AOTC as model for “tax relief targeted at helping low- and middle- income families” ABLE Plans Not discussed, but given broad support and recent enactment, seems likely to be maintained Select Issues Specific to NAST Established. Informed. Engaged.

9. Next Steps House Speaker Ryan has instructed the Ways and Means Committee to continue to develop and fill in the proposals embodied in the Blueprint. The Committee will work to develop and add substance to statements suggesting it will make tax provisions more “effective and efficient” The Committee is expected to develop a full legislative proposal (not to be released) by the end of the year that would be available in 2017 should an opportunity to pursue tax reform arise. The Blueprint can be found at: http://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf http://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf Established. Informed. Engaged.

10. Contact Information Williams & Jensen Christopher Hatcher cwhatcher@wms-jen.com (202) 659-8201 National Association of State Treasurers nast@statetreasurers.org Established. Informed. Engaged. Matthew Hoekstra mbhoekstra@wms-jen.com (202) 659-8201