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Tax legislative outlook Washington Council Ernst & Young February-March 2012.

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1 Tax legislative outlook Washington Council Ernst & Young February-March 2012

2 Page 2 What’s on the horizon? Longer-term extension of payroll tax cut, UI, doc fix, plus discussion of “tax extenders” Continued discussion of tax reform: Camp draft, Enzi bill, Obama framework Consideration of other transportation programs, such as FAA and highway funding What to do about expiration of Bush tax cuts, budget sequester?

3 Page 3 Factors driving tax policy changes in the new year Politics Short-term tax provisions Bush tax cuts Tax reform

4 Page 4 Election year politics influences legislative landscape President, Congress already in campaign mode ► Fight over payroll tax extension emblematic of difficulty reaching bipartisan agreement ► Obama calling for greater income equality, job creation ► Enjoying spike in polls due to better unemployment numbers ► Budget proposal to partly serve as campaign document, e.g. proposals to require minimum tax rate on multinational companies and millionaires won’t become law but may appeal to voters Some controversial items may not be resolved until lame- duck session of Congress, after election ► Tax extenders ► Bush tax cuts ► Budget sequester as a result of Super-committee failure

5 Page 5 Legislative Environment for Energy Policy ►Jobs/ Economic Growth Dwarfs other topics ►Climate Change is No Longer a Policy Driver ►Skepticism regarding Green Jobs claims made by stimulus recipients ►Renewables Under GOP Attack as Proxy for Stimulus, Obama/Pelosi Agenda

6 Page 6 Post-election session likely to focus on tax issues ►November elections may influence how the parties will address tax issues in lame-duck session ►Allowing tax rates to go up is politically difficult for both sides ►Democrats inclined to let rates go up for higher income taxpayers, but may not be able to achieve that and get extensions for middle and lower income levels ►If attempt to offset costs, parties differ on revenue offsets— spending cuts (Rs) v. tax increases (Ds) ►Congress/Obama may opt not to pay for extensions similar to 2010 ►Deficit concerns put pressure on paying for bill ►Can acceptable offsets of sufficient magnitude be found? ►Compromise could be unpaid for short-term extension with commitment to undertake tax reform in 2013

7 Page 7 Congressional profile House ► 87 Republican freshmen in the current Congress, 30 of whom from districts Obama won in 2008 ► 20 Democrats have announced they won’t run this year: 12 retiring, 8 running for other office ► 15 Republicans have announced they won’t run this year: 8 retiring, 7 running for other office Senate ► 9 current senators will not run for re-election (6 Democrats, 2 Republicans, 1 independent) ► 10 Republican seats are up for election in 2012 (Lugar, Brown, Hatch, Heller seen vulnerable) ► 23 Democratic seats are up for election in 2012 (many vulnerable) 242 Republicans192 Democrats Plus 1 vacancy : Giffords, D-AZ: Special election June 12 47 Republicans53 Democrats 2 independents caucus with Democrats

8 Page 8 Current and future deficits and federal debt $1.1 trillion FY2012 deficit Current policies Extending Bush tax cuts beyond 2012 Medicare payment rates for physicians’ services Extending tax extenders beyond 2011 AMT patch Federal debt, FY2012: $16 trillion $11 trillion FY2013–2022 deficit under current POLICIES Debt projection, 2022: $21.6 trillion $3.1 trillion FY2013–2022 deficit under current LAW Spending reductions required by BCA do not take effect

9 Page 9 Budget deficit projections Current Law Baseline Deficit $4.7 trillion $429 billion $2.2 trillion $1.9 trillion Index to inflation 2011 parameters of AMT Extend Medicare `doc fix’ Extend current estate, gift, generation-skipping taxes $9.7 trillion = $431 billion = + + + 2013-2022 Continue 2001 and 2003 tax cuts Adjusted Baseline Deficit +

10 Page 10 Current policies could add trillions to deficit over 10 year period Extending the Bush tax cuts and AMT patch $5.35 trillion $1.2 trillion $372 billion $1 trillion Extending other tax provisions like tax extenders Extending Medicare `doc fix’ Rolling back BCA sequester $7.9 trillion = $6.7 trillion = + + + Notes: Estimated cost of extension over 10 years, FY2013-2022, including debt service Source: Congressional Budget Office, CBO Budget and Economic Outlook: Fiscal Years 2012 to 2022, January 31, 2012. +

11 Page 11 CBO's annual deficit projections, fiscal years 2011-2022 Notes: 2011 is actual deficit. CBO’s alternative scenario the current law baseline with the following adjustments: all expiring individual and business tax provisions are extended through 2022, Medicare payments to physicians are not reduced, and the sequestration does not occur as scheduled. The current law baseline and the alternative scenario both assume that the current payroll tax cut expires on Feb. 29, 2012. Source: Congressional Budget Office, CBO Budget and Economic Outlook: Fiscal Years 2012 to 2022, January 31, 2012.

12 Page 12 Long-run federal spending and revenue projections Sources: Congressional Budget Office, Long-Run Budget Outlook — Alternative Fiscal Scenario (June 2011); Monthly Treasury Statement (September 2011, for FY 2011 only. Estimates do not take into account Budget Control Act of 2011. Composition of federal spending as a percent of GDP: 1970 to 2050 18.0% historical revenue level, 1970–2010

13 Page 13 Sources and uses of federal revenues, FY2011 Total: $2.3 trillionTotal: $3.6 trillion Source: Monthly Treasury Statement (Oct. 2011); OMB Supplemental Materials: Outlays; Medicare Trustees Report 2011 Notes: “Other” revenue includes Federal Reserve earnings, customs duties, and other miscellaneous receipts. “Other Entitlement” includes Medicaid, unemployment compensation, housing assistance, food stamps, federal employee and military retirement, and veterans’ benefits. “Non-defense discretionary” includes international affairs, transportation, commerce and housing credit, energy, education, science and technology, natural resources, community and regional development, health, administration of justice, general government and allowances. Expenditures Revenues

14 Page 14 The economy Housing market remains weak Unemployment ► Home values have dropped by one-third since 2006 peak ► Inventory of foreclosures continue to put downward pressure on home prices ► Obstacles limiting access to mortgage credit contribute to weakness in housing demand (Fed, 1/12) ► December 2011 unemployment at 8.5% ► Trended downward in 2011 ► 8.6% in November 2011 ► 9.1% in August 2011 ► CBO predicts will get worse in 2012 (1/12 budget outlook) ► 8.9% for 2012 ► 9.2% for 2013

15 Page 15 2012 timeline ► FEB 29 Expiration of ► Payroll tax relief ► Expanded unemployment benefits ► Medicare physicians payment rate ► JAN 24 President delivered State of the Union address ► NOV 6 Election Day ► END OF 2011 Tax extenders expired JANMARCHFEBAPRIL 2013 MAYJUNEJULYAUGSEPTOCTNOVDEC2012 ► FEB 13 Obama FY2013 budget released ► POST- ELECTION Lame-duck session ► MARCH 31 Highway funding expires ► 2013 Bush tax cuts expire; Sequester with 9-10% cut in discretionary spending ► SEPT 30 Government funding expires with end of fiscal year

16 Page 16 Factors driving tax policy changes in the new year Politics Short-term tax provisions Bush tax cuts Tax reform

17 Page 17 ► Debt limit negotiations ► $900 billion debt limit increase agreed to, at last minute, in exchange for $917 billion in deficit reduction from discretionary spending caps for period from FY 2012-2021 ► Deficit reduction offsets for additional debt limit increase delegated to Joint Select Committee (“Super Committee”) ► Super-committee ► Bipartisan 12-member panel announced Nov. 21 it could not reach agreement on $1.2 trillion-plus in deficit reduction ► Payroll tax, other expiring items ► Dispute over revenue offsets, etc. resulted in 2-month extension just before Christmas 2011 marked by partisan gridlock

18 Page 18 -No tax increases, unless Bush tax cuts are extended, with reduced rates -Focus on spending cuts -Entitlement cuts must be accompanied by tax increases for high incomes RepublicansDemocrats Gridlock attributable to opposing views on how to achieve deficit reduction

19 Page 19 Payroll relief, UI, doc fix extended through 2012 Extension through remainder of 2012 (10 months): ►Payroll tax relief ►not paid for ►Expanded unemployment benefits ►offset by revenue from spectrum auctions and a change to Federal employee pension contributions ►Medicare ‘doc fix’ ► paid for with various Medicare-related offsets ►Tax extenders and bonus depreciation not included

20 Page 20 Tax extenders Package of 60 business and individual “tax extenders” expired 31 Dec 2011 Efforts to attach extenders to payroll bill were unsuccessful Precedent exists for the provisions to expire, then be seamlessly extended Active financing exception CFC look-through R&D credit Renewable energy credits State/local Sales tax deduction Estimated cost of 1-year extension: $37 billion NMTC

21 Page 21 Select corporate tax provisions expired at end of 2011 R&D credit Active financing exception CFC look-through 100-percent bonus depreciation Indian employment tax credit New markets tax credit Mine rescue team training credit Employer wage credit for military reservists Credit for maintaining railroad tracks Work opportunity tax credit Qualified zone academy bonds 15-year cost recovery for leaseholds, restaurants 7-year recovery for motorsports complexes Accelerated depreciation for Indian reservation Enhanced charitable deduction for food inventory Enhanced charitable deduction for book inventory Enhanced charitable deduction for computers Small business expensing Election to expense advanced mine safety equipment Expensing rules for film and television Expensing of “brown fields” remediation Deduction for domestic production activities in Puerto Rico Modification of tax treatment of certain payments to controlling exempt organizations Basis adjustment to stock of S corporations making charitable contributions of property Reduction in S corporation recognition period for built-in gains tax Treatment of certain dividends of regulated investment companies (“RICs”) RIC qualified investment entity treatment under FIRPTA Rum excise tax American Samoa economic development credit

22 Page 22 Energy provisions expired at end of 2011 ► Credit for certain non-business energy property ► Conversion credit for plug-in electric vehicles ► Alternative fuel vehicle refueling property ► Incentives for alcohol fuels ► Incentives for biodiesel and renewable diesel ► Coal production credit ► Credit for construction of new energy efficient homes ► Credit for energy efficient appliances ► Grants for specified energy property in lieu of tax credits ► Suspension of percentage depletion for oil and gas from marginal wells ► Incentives for alternative fuel and alternative fuel mixtures

23 Page 23 Energy provisions expiring at end of 2012 ► Cellulosic biofuel producer credit ► Place-in-service date for wind facilities to claim electricity production credit ►Election to claim the energy credit in lieu of the electricity production credit for wind facilities ►Special depreciation allowance for cellulosic biofuel plant property

24 Page 24 Energy Extenders: What’s stopping them? ►Cost of Entire Extender Package: Over $30 Billion/ year ►Inability to agree on whether/how to offset the cost ►Controversial Items: Ethanol blenders credit, Treasury section 1603 Grants ►House and Senate Tax Writers Vow to Delay Extension until package “scrubbed” of outdated provisions

25 Page 25 What’s new in the Obama FY2013 budget? Dividends to be taxed as ordinary income for incomes over $250,000 ► Previous budgets set 20% top rate ► 20% top rate still proposed for capital gains ► Would raise/save $206 billion/10 years Buffett Rule proposed to replace alternative minimum tax ► “Buffett Rule” to require 30% minimum tax on annual incomes over $1 million Insourcing/outsourcing proposals ► Eliminate deduction for moving operations overseas, new credit to relocate back to U.S. ► Tax credit for investments in distressed areas ► Double 199 deduction for advanced manufacturing New int’l proposals ► Tax gain from the sale of a partnership interest on a look- through basis ► Extend Sec. 338(h)(16) to certain asset acquisitions ► Remove foreign taxes from a Sec. 902 corporations foreign tax pool when earnings eliminated ► Prevent leveraged distributions from related foreign corporations to avoid dividend treatment

26 Page 26 FY2013 budget revenue-raising proposals ► Repeal preferences for oil and gas industry ► Repeal preferences for coal industry ► Reinstate Superfund excise taxes ► Reinstate Superfund environmental income tax $36.3 billion $4.4 billion $6.5 billion $12.9 billion Energy ► Restore 2009 parameters ► Require consistent valuation for transfer and income tax purposes ► Modify rules on valuation discounts ► Require a minimum term for grantor-retained annuity trusts ► Limit duration of generation-skipping transfer tax rules applicable to grantor trusts ► Coordinate certain income and transfer tax rules applicable to grantor trusts ► Extend the lien on estate tax deferrals provided under Section 6186 $119 billion $2 billion $18 billion $3.3 billion Negligible $910 million $160 million Estate and gift ► Impose financial crisis responsibility fee ► Require accrual of income on forward sale of corporate stock ► Require ordinary treatment of income from day-to-day dealer activities ► Modify definition of “control” for purposes of Section 249 $61.3 billion $303 million $192 million $12.9 billion Financial institutions ► Modify rules that apply to sale of life insurance contracts ► Modify proration rules for life insurance company general and separate accounts ► Expand pro rata interest allowance for COLI $811 million $7.7 billion $7.3 billion Insurance Source: OMB FY2013 Budget

27 Page 27 Democrats - X % surtax on income over $1 million - Corporate tax loophole closers (proposal likely to emerge week of Feb. 6) Revenue offsets that were in play for payroll- plus package Both Parties -Increased GSE guarantee fees (financed 2-month bill) - Means testing for unemployment benefits, food stamps - Revenue from drawing down forces in Iraq and Afghanistan? Republicans - Federal civilian workforce pay freeze - changing the co-pay structure for civilian federal retirees - spectrum auctions - flood insurance reform - ensuring illegal immigrants who are not eligible to work in the US do not get IRS checks - requiring SSN to collect child tax credit

28 Page 28 Factors driving tax policy changes in the new year Politics Short-term tax provisions Bush tax cuts Tax reform

29 Page 29 Major year-end tax changes if Congress does not intervene ► Expiration of the 2001/2003 tax relief at the end of 2012 ► Highest marginal income tax rates will rise to 36% and 39.6% from 33% and 35%, respectively. ► 10% rate bracket will be eliminated. ► Maximum rate on qualified dividends will rise from 15% to 39.6%. ► Maximum rate on long-term capital gains will rise from 15% to 20%. ► Phaseouts of itemized deductions and personal exemptions will be reinstated for high-income individuals. ► Marriage penalty relief will expire. ► Child tax credit will decline from $1,000 to $500. ► Maximum estate tax rate will rise from 35% to 55% and exemption will fall from $5 million to $1 million.

30 Page 30 Scheduled 2013 individual tax rates DescriptionCurrent ratesScheduled rates for 2013Other additions Individual income tax rates 10%; 25%; 28%; 33%; 35% 15%; 28%; 31%; 36%; 39.6% Reinstate personal exemption phase-out (PEP) and Pease limitation on itemized deductions Individuals with income over $250,000 (joint) or $200,000 (individual) face tax increases of: ► 0.9% on wages (on amounts exceeding threshold) and ► 3.8% on investment income (e.g., interest, dividends, capital gains) if AGI exceeds threshold Qualified dividends0%; 15%Individual income tax rate, with top rate of 39.6% Long-term capital gains 0%; 15%20% Estate tax35% top rate; $5 million exemption 55% top rate; $1 million exemption

31 Page 31 Political perspectives on expiring Bush tax cuts Allowing tax rates to go up is politically difficult Congress could opt not to pay for bill like 2010 Fundamental reform could avoid fights over expiring tax rates and provisions, though coming to agreement on reform will be difficult 2 3 4 5 1 Parties differ on revenue offsets—spending v. tax 6 5 Deficit concerns put pressure on paying for bill Democrats want to let cuts expire for high incomes

32 Page 32 Factors driving tax policy changes in the new year Politics Short-term tax provisions Bush tax cuts Tax reform

33 Page 33 Major drivers of tax reform ► The United States has among the highest corporate tax rates and is among the few nations with a worldwide system of taxing foreign earnings ► Economists believe this hampers the competitiveness of US firms ► The system is complex, largely due to the temporary nature of many tax provisions ► Desire to `clean out junk’ in Code ► Uncertainty of provisions, including Bush tax cuts

34 Page 34 Corporate tax rates in the OECD, 2011 Note: Includes both national and sub-national statutory corporate tax rates. Source: OECD, IMF Percent

35 Page 35 This year in tax reform What happened in 2011?What do we expect in 2012? ► Loose consensus about broadening the tax base (i.e., removing many provisions) to lower tax rates ► 2010 Bowles-Simpson panel backed this approach ► Several hearings in Ways & Means, Senate Finance ► Chairman Camp discussion draft ► 25% rate envisioned, territorial system outlined ► Treasury White Paper on corporate reform was expected but not released ► Wyden-Coats Obama tax reform plan coming in February ► Wants Congress to act on insourcing reforms immediately Camp draft ► Further meetings with stakeholders ► More hearings expected ► Version 2.0? Sen. Portman plan expected by spring ► Comprehensive plan to achieve 25% rate expected Senate Finance Committee ► Chairman Baucus could release tax reform draft of his own ► More hearings expected

36 Page 36 The President’s Framework for Business Tax Reform Cut provisions to cut corp. rate ► 28% corporate rate ► No comprehensive list of provisions to be cut, but a few are highlighted: ► LIFO, oil/gas, carried interest, jet depreciation ► Depreciation, deductibility of interest expense should also be considered Manufacturing Incentives ► Cut effective rate for manufacturers to 25% by refocusing Sec. 199 manufacturing deduction ► Increased to 10.7% ► Permanent R&D credit ► Energy incentives International tax ► Appears to call for retention of the worldwide system of taxing foreign earnings ► Comes out against pure territorial system ► US-based companies to pay an unspecified minimum tax on foreign earnings Small business ► Make tax filing simpler ► Allow expensing up to $1 million in investments ► Allow cash accounting on businesses with up to $10 million in gross receipts Fiscal responsibility ► Plan is revenue neutral, but $250 billion required to make permanent temporary provisions that are routinely extended, ► Temporary provisions must be paid for or eliminated

37 Page 37 The President’s Framework for Business Tax Reform ►Cut Provisions, Broaden Base, Cut Corporate Tax Rate ►Rate lowered to 28% ►No comprehensive list of provisions to be cut, but some highlighted ►eliminating “last in first out” (LIFO) accounting ►eliminating oil and gas tax preferences ►reforming treatment of the insurance industry and products ►taxing carried (profits) interests as ordinary income ►eliminating special depreciation rules for corp. purchases of aircraft ►Other changes should be considered: elimination of depreciation schedules limiting deductibility of interest expense ►Strengthen American Manufacturing and Innovation ►Cut effective rate for manufacturers to 25% by increasing Sec. 199 manufacturing deduction to 10.7% ►Make permanent R&D credit, energy tax incentives

38 Page 38 The President’s Framework for Business Tax Reform (continued) ►Strengthen the International Tax System ►Appears to call for retaining worldwide system for foreign earnings ►Comes out against pure territorial system ►US-based companies to pay unspecified minimum tax on foreign earnings ►Simplify and Cut Taxes for America’s Small Businesses ►Make tax filing simpler ►Allow expensing up to $1 million in investments ►Cash accounting on businesses with up to $10 million in gross receipts ►Restore Fiscal Responsibility ►Plan is revenue neutral, but $250 billion required to make permanent temporary provisions that are routinely extended ►Temporary provisions must be paid for or eliminated

39 Page 39 President’s Framework for Business Tax Reform Energy-Related Provisions The President’s “Framework for Business Tax Reform” was released on February 22 nd. It would eliminate “dozens of tax loopholes and subsidies” and reform the business tax base to reduce the corporate tax rate from 35% to 28% (with a 25% rate on manufacturing income). Most tax expenditures for specific industries would be eliminated, with only a few exceptions “that are critical to broader growth or fairness.” The Framework would repeal all tax preferences for fossil fuels, including expensing of intangible drilling costs and percentage depletion for oil and natural gas wells. President’s Framework Retains Incentives for Clean Energy. ►Unlike the approaches to fundamental tax reform offered by the Republican Presidential candidates, the President’s Framework retains “key incentives to encourage investment in clean energy.” For example, the Framework would make permanent the “tax credit for the production of renewable electricity, in order to provide a strong, consistent incentive to encourage investments in renewable energy technologies like wind and solar.” The Framework would make the production tax credit refundable.

40 Page 40 Broad interest in restricting tax expenditures to lower rates “”What I'd like to see is — and we're working on a structure to do that — is how low can we get rates? And that means where is the political consensus on how many — and you can call it tax provision, or loophole or expenditure, whatever you want to describe it as — how many of those can we change so we have a more constant effective rate? We also need to move, I think, to a territorial tax system so that we can compete around the world.” – House Ways and Means Committee Chairman Dave Camp (R- MI), June 21, 2011. “Just lowering the rate only and eliminating a lot of tax expenditures is not going to provide enough revenue to get the rates down to a low enough level to make a difference that most people are looking for. So we are going to have to maybe look at pass-throughs and say they have got to be treated as corporations if they earn above a certain income.” – Senate Finance Committee Chairman Baucus (D-MT), May 4, 2011. “Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it.” – President Obama, Jan. 24, 2012.

41 Page 41 Obama framework out week of Feb. 20 Geithner says effort to allow lawmakers to capitalize on the common ground that has already emerged in Congress on corporate reform More specific than principles, but not as detailed as legislative language Will preserve a limited number of tax preferences aimed at improving incentives for designing, creating and building in the United States Calls for broad reform that will lower rates, broaden the base and eliminate “dozens of special tax preferences for businesses.”

42 Page 42 ► A base-broadening effort could disadvantage certain industries, favor others ► Likely losers: manufacturers ► Likely winners: financial companies, retailers, transportation ► Base-erosion provisions like those in Camp discussion draft could cost companies billions of dollars ► What to do about pass-through entities? ► Many, particularly Republicans, feel individual reform should accompany corporate reform to avoid disadvantaging pass-throughs ► Others see changing pass-through taxation as a revenue source ► Obama administration ► Senate Finance Committee Chairman Baucus ► Will ‘reform’ get bogged down by tax fairness argument? Political difficulties of reform proposals

43 Page 43 JCT memo on reducing corporate rate Thus, reducing the statutory corporate rate from 35% to 25% requires “base broadening” of up to $1.2 trillion/10 years Roughly, a 1%-point reduction in the US corporate tax rate costs $100 billion- $110 billion/10 years $650 billion derived from repealing expenditures for manufacturers: accelerated depreciation and domestic production activities deduction October 2011 JCT Memo to Rep. Levin: reduction in corporate tax rate to 28% estimated to cost $717 billion/10 years

44 Page 44 OMB Largest Tax Expenditures, Fiscal Year 2013 $ billions Source: Analytical Perspectives FY2013

45 Page 45 Highlights of JCT estimates on repeal of corporate tax expenditures– memo to Cong. Levin (D-MI) 27 Oct. Provision to be repealed$raised/10 years* Repeal MACRS/apply ADS$507 billion Expensing of R&D expenditures$152 billion Domestic production activities deduction$127 billion LIFO$63 billion Low-income housing tax credit$33 billion Deferral of gain on like-kind exchanges$16 billion Completed contract rules method$14 billion Percentage depletion for oil and natural gas wells/coal$10 billion Exclusion of interest on private activity bonds$9 billion * Portion of revenue attributable to C corps

46 Page 46 Highlights of JCT estimates on repeal of corporate tax expenditures (cont.) Provision to be repealed$raised/10 years* Repeal MACRS/apply ADS$724 billion Domestic production activities deduction$164 billion Expensing of R&D expenditures$160 billion LIFO$70 billion Low-income housing tax credit$35 billion Deferral of gain on like-kind exchanges$18 billion Completed contract rules method$14 billion Percentage depletion for oil and natural gas wells$11 billion Exclusion of interest on private activity bonds$9 billion * Portion of revenue attributable to C corps AND pass-through entities

47 Page 47 Key elements of recent tax reform proposals Camp Discussion Draft Fiscal Commission report Bipartisan Policy Center (Domenici- Rivlin) plan Rep. Ryan’s Road Map for America’s Future (2010) Corporate tax rate 25%28%27% Corporate income tax replaced with 8.5% subtraction-method VAT Corporate tax expenditures UnspecifiedEliminatedMany eliminated Research credit Unspecified Repealed Repealed; retains expensing for R&D expenditures International taxation Territorial—95% exemption, thin capitalization rules and anti-abuse provisions. Territorial system, current taxation of passive foreign income retained Retains deferral and worldwide system with FTC Individual tax changes Unspecified Individual tax brackets: 12%, 22%, 28%. Capital gains and dividends taxed as ordinary income Individual tax brackets: 15%, 27%. Capital gains and dividends taxed as ordinary income Individual tax brackets: 10%, 25%. Zero tax rate for interest, capital gains and dividends

48 Page 48 Potential tax reform winners/losers under Fiscal Commission’s Proposal Repeal of special industry tax rules Repeal of accelerated depreciation Corporate rate reduction Repeal of Sec. 199 deduction for domestic production Move to territorial international tax system Drivers Winners Retail (MNC, domestic) Wholesale (MNC, domestic) Transportation (MNC, domestic) Information (MNC, domestic) Finance and insurance (domestic) Services (MNC, large domestic) Losers Renewable energy Utilities (MNC only) Mining & agriculture Real estate (MNC, domestic) Manufacturing (MNC, domestic) Services (small domestic only) Analysis uses a 28% corporate tax rate and is based on broad description of territorial tax regime (and assumes adoption of some international base broadeners); analysis could be altered depending on exact shape of territorial regime. *Fiscal Commission’s tax reform proposal was released in December 2010.

49 Page 49 Energy & Energy Tax – Longer Term ►Electricity and Liquid Fuels rules to be harmonized as electricity becomes a transportation fuel ►Technology neutrality to harness environmental performance and energy density to allocate incentives ►Federal statutes may need adjustment to reflect fact that commercial aviation & military becoming strong markets for biofuels; ►Bipartisan push to wean renewables off of permanent incentives

50 Page 50 Where do we go from here? ►Short Term: ►Retroactively extend current tax incentives in first available vehicle ►Medium Term: ►Reform renewable energy tax incentives ►Long Term: ►Play role in assembling new tax code during debate on the Tax Reform Act of 2014


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