Coming Changes in Tax Policy and Domestic Politics

Summit 2011Director and Officers Training Conference

December 2, 2011The View from Washington and Industry Leadership

Joan WoodwardExecutive Vice President, Public PolicyThe Travelers Companies, Inc.

travelersinstitute.comtravelersinstitute.com 2

I. Election Results – A New Mandate for Change

II. Legislative Recap

Super Committee Failure ---- Now What?

Healthcare Law

Dodd-Frank Act

Economic Outlook

Washington Policy and Political Outlook


Obama: 364

McCain: 174

Electoral College – Mandate for ChangeBut Did the Democrats Overreach?


Republicans Take Back the House


Republicans Make Gains in the Senate

BALANCE OF POWER

51 Democrats 2 Independent 47 Republicans


U.S. Senate Gain/Loss**

2009-2010 January 2011

Republicans - 41 + 6 Republicans - 46

Democrats - 59

*incl. two Independents

- 6 Democrats - 53

*incl. two Independents

U.S. House Gain/Loss*

2009-2010 January 2011

Republicans - 178

+ 64 Republicans - 242

Democrats - 255 - 62 Democrats - 193

Independent - 2

In 2010, Republicans Regain the House After Four Years


United States Governors Offices by PartyNovember 1, 2010

Democrat: 28

Republican: 22


United States Governors Offices by PartyNovember 3, 2010

Republican: 29Democrat: 20 Independent: 1


Representative Michelle Bachmann, Minnesota

Herman Cain, Former CEO

Newt Gingrich, Former Speaker of the House

Jon Huntsman, Former Governor of Utah, Former Ambassador to China

Representative Ron Paul, Texas

Governor Rick Perry, Texas

Mitt Romney, Former Governor of Massachusetts

Rick Santorum, Former Senator from Pennsylvania

Republican Presidential Primary Candidates


Budget Battles to Continue….

Government Shutdown Avoided in April and debt ceiling raised August 2nd

Current U.S. Debt over $15 Trillion

Debt Ceiling Default Avoided Established caps on discretionary spending thru 2021 Requires a vote on a balanced budget amendment in 2011

House rejected Amendment Nov. 18th by a vote of 261 in favor to 165 opposed

Established procedures to increase the debt limit by $400 Bil. on August 2nd

S & P Downgrade of U.S. Government Treasuries


Super Committee Membership

Democrat Democrat Democrat Republican

Republican

Republican

Senate Patty Murray (WA & Co-Chair)

Max Baucus (MT)

John Kerry (MA)

Jon Kyl (AZ)

Rob Portman (OH)

Pat Toomey (PA)

House Xavier Becerra (CA)

James Clyburn (SC)

Chris Van Hollen (MD)

Jeb Hensarling (TX & Co-Chair)

Dave Camp (MI)

Fred Upton (MI)

Who we thought would be the Compromisers…


Super Committee Failure….

Across-the-board spending cuts now triggered

Cuts will total $1.2 Trillion over a ten year period and will come from the following:

Defense Cuts: $492 Billion

Non-Defense Cuts: $492 Billion

Reduction in Debt Service Costs: $215 Billion

Cuts do not go into effect until January 2, 2013

President Obama has threatened to veto any legislation amending the mandatory spending cuts


Healthcare Law

U.S. House voted to repeal the healthcare law in January: 245-189 vote

Repeal failed in Senate: 47-51 vote 4 moderate Democrats (Joe Manchin, D-WV; Ben Nelson, D-NE; Claire McCaskill, D-MO;

Jon Tester, D-MT) looking to repeal individual mandate

Law has been ruled on by 4 district courts and 4 appeals courts District courts in Detroit, Michigan and Lynchburg, Virginia upheld the law District court in Richmond, Virginia ruled the individual insurance coverage mandate to

be unconstitutional. September, 2011, 4th Circuit Court of Appeals ruled that Virginia has no right to challenge law

District Court in Pensacola, Florida deemed entire law unconstitutional 6th Circuit Court of Appeals, Cincinnati, Ohio ruled that the individual mandate is a valid

use of power 11th Circuit Court of Appeals, Atlanta, Georgia ruled that individual mandate is

unconstitutional but the rest of the law can stand D.C. Circuit Court of Appeals upheld law in its entirety

Supreme Court to hear arguments on 11th Circuit case March 2012 with ruling expected in June 2012


Largest Regulatory Change to the U.S. Financial System since the Great Depression

Impacts virtually every sector of the U.S. economy – mostly banks

Two Main Goals behind the Act:

Limiting future risk taking to prevent “systemic risk” before it happens

Consumer Financial Protection Agency Elizabeth Warren leaves government to run for Massachusetts Senate seat Richard Cordray, former Ohio Attorney General, nominated

Dodd-Frank Act


2001 Bush Tax Cuts Extended Thru End of 2012

Tax Relief expiring December 31, 2012 Extension of current tax rates

Top marginal tax rate for individuals is 35.0% Maximum long-term rate for capital gains and dividend income is 15.0% Maximum estate tax rate is 35%; first $5 million exempt

Many middle-income taxpayers exempt from alternative minimum tax (AMT)

Tax credits for children, education and other incentives

Tax Relief expiring December 31, 2011 2% payroll tax holiday for employees (reduce FICA from 7.65% to

4.65%, up to wage base cap of $105K) One-year 100% expensing of investments (including equipment) for

businesses; 50% second year Unemployment benefits for long-term jobless President Obama proposes extending thru 2012


GDP Percentage Change Versus Prior Quarter (1980-2011)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1980q1

1980q4

1981q3

1982q2

1983q1

1983q4

1984q3

1985q2

1986q1

1986q4

1987q3

1988q2

1989q1

1989q4

1990q3

1991q2

1992q1

1992q4

1993q3

1994q2

1995q1

1995q4

1996q3

1997q2

1998q1

1998q4

1999q3

2000q2

2001q1

2001q4

2002q3

2003q2

2004q1

2004q4

2005q3

2006q2

2007q1

2007q4

2008q3

2009q2

2010q1

2010q4

2011q3

2011 Q1 Growth: 0.4% Q2 Growth: 1.3% Q3 Growth: 2.0%

Percen

tag

e C

han

ge

16

U.S. GDP Quarter-Over-Quarter Change

Unemployment hit 10.8% during the Reagan Recession

Unemployment hit 10.8% during the Reagan Recession

First 4 consecutive quarters of negative

GDP growth since 1947

First 4 consecutive quarters of negative

GDP growth since 1947


50.0

60.0

70.0

80.0

90.0

100.0Ja

n-0

6

Ap

r-0

6

Ju

l-0

6

Oct-

06

Ja

n-0

7

Ap

r-0

7

Ju

l-0

7

Oct-

07

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oct-

08

Ja

n-0

9

Ap

r-0

9

Ju

l-0

9

Oct-

09

Ja

n-1

0

Ap

r-1

0

Ju

l-1

0

Oct-

10

Ja

n-1

0

Ap

r-1

1

Ju

l-1

1

Oct-

11

Ja

nu

ary

196

6 =

10

0

Monthly Index of Consumer Sentiment

3-Month Moving Average of Monthly Index of ConsumerSentiment

Source: University of Michigan

University of Michigan Index of Consumer Sentiment

October 2011: 60.9

November 2011: 64.1


National Unemployment Rate from 01/2006 - 10/2011

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Ap

r-0

6

Ju

l-0

6

Oct-

06

Ja

n-0

7

Ap

r-0

7

Ju

l-0

7

Oct-

07

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oct-

08

Ja

n-0

9

Ap

r-0

9

Ju

l-0

9

Oct-

09

Ja

n-1

0

Ap

r-1

0

Ju

l-1

0

Oct-

10

Ja

n-1

1

Ap

r-1

1

Ju

l-1

1

Oct-

11

Unem

plo

ym

ent R

ate

Source: United States Department of Labor, Bureau of Labor Statistics

Unemployment Rate inOctober 2011 was 9.0%:

Current Unemployment Demographic Data: African American: 15.1% Asian: 7.3% Hispanics: 11.4% White Americans: 8.0% W/O High School Deg: 13.8% With High School Deg: 9.6% Some College: 8.3% With College Deg: 4.4% Unemployment Status:

57.1% for more than 15 wks 42.8% for more than 27 wks

A Jobless Recovery in the US Continues

Unemployment hit 10.2% in October

2009

Unemployment hit 10.2% in October

2009

December 2007:Unemployment Rate:

4.9%-Beginning of Recession

December 2007:Unemployment Rate:

4.9%-Beginning of Recession


US Budget Surplus or Deficit (in $B)

(300.0)

0.0

300.0

600.0

900.0

1200.0

1500.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

2015E

Year

Su

rp

lus o

r D

efi

cit

19

Source: Congressional Budget Office

U.S. Federal Deficit ($in Billions)

Clinton Surplus Years

Clinton Surplus Years

2009 US Budget Deficit Hit $1.4

Trillion

2009 US Budget Deficit Hit $1.4

Trillion


US State and Municipal Debt Crisis $1 Trillion of unfunded liabilities

Pension and other post-employment benefits

Combined 2011 budget shortfall of $125 billion High jobless rates, reduction in state and local tax receipts

Federal Intervention Bankruptcy

Currently only municipalities can file for protection Some discussion that states may be allowed to file for bankruptcy, but this is not

likely Largest municipal debt bankruptcy in history in Jefferson County, Alabama; over

$1 Billion1 Source: Pew Center on the States – “The Trillion Dollar Gap” (February 2010) 2 Source: Center on Budget and Policy Priorities

1

2


State Budget Battles Continue

CA: $25 Billion Deficit

Cut $3 Billion for schools

70 state park closures

CT: $3.2 Billion Deficit

Sales and retroactive income tax increases

Union concessions demanded

FL: $3.6 Billion Deficit

Cut $1.35 Billion for schools

4,500 state government positions eliminated

Mandatory drug tests for welfare recipients

OH: $8 Billion Deficit

Privatized state prisons

Tied teacher pay to student achievement

MN: $5 Billion Deficit

Twenty day shutdown over budget

Delayed payment of school funds and borrowed against state’s tobacco settlement

WI: $3.6 Billion Deficit

Ended collective bargaining rights for most state employee unions

Recall elections validated Governors plan

Brown: 49% Approval

Scott: 37% Approval

Dayton: 52% Approval

Malloy: 41% Approval

Kasich: 35% Approval

Walker: 37% Approval


News & Politics

Coming Changes in Tax Policy and Domestic Politics