INCOME TAXES

Total income tax expense is presented below:



	Year Ended December 31,
(in millions)	2016			2015			2014
Income tax expense		$489			$423			$403
Tax effect of changes in OCI	(168		)	(12		)	154
Total comprehensive income tax expense		$321			$411			$557

Components of income tax expense are presented below:



(in millions)	Current		Deferred			Total
Year Ended December 31, 2016
U.S. federal		$292		$159			$451
State and local	44		(6		)	38
Total		$336		$153			$489
Year Ended December 31, 2015
U.S. federal		$162		$225			$387
State and local	12		24			36
Total		$174		$249			$423
Year Ended December 31, 2014
U.S. federal		$224		$145			$369
State and local	38		(4		)	34
Total		$262		$141			$403

The effective income tax rate differed from the U.S. federal income tax rate of 35% in 2016, 2015 and 2014 as presented below:



	Year Ended December 31,
	2016					2015					2014
(dollars in millions)	Amount			Rate		Amount			Rate		Amount			Rate
U.S. Federal income tax expense and tax rate		$537		35.0	%		$442		35.0	%		$444		35.0	%
Increase (decrease) resulting from:
State and local income taxes (net of federal benefit)	38			2.5		27			2.1		22			1.7
Bank-owned life insurance	(19		)	(1.2	)	(20		)	(1.6	)	(17		)	(1.3	)
Tax-exempt interest	(19		)	(1.3	)	(17		)	(1.3	)	(15		)	(1.2	)
Tax advantaged investments (including related credits)	(31		)	(2.0	)	(16		)	(1.2	)	(27		)	(2.1	)
Other tax credits	(14		)	(0.9	)	—			—		—			—
Non-deductible expenses	—			—		8			0.6		—			—
Other	(3		)	(0.2	)	(1		)	(0.1	)	(4		)	(0.3	)
Total income tax expense and tax rate		$489		31.9	%		$423		33.5	%		$403		31.8	%

The decrease in the effective tax rate from 2015 to 2016 is primarily attributable to the benefits of federal and state tax credits.

The effective income tax rate for the year ended December 31, 2015 reflected the adoption of ASU No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects.” The application of this guidance, which began on January 1, 2015, resulted in the reclassification of the amortization of these investments to income tax expense from noninterest income. See Note 6 “Variable Interest Entities,” for further information.

The increase in the effective tax rate from 2014 to 2015 is primarily attributable to the Company’s adoption of ASU 2014-01. Additionally, the 2015 effective tax rate was affected by the impact of non-deductible permanent expense items incurred by the Company in 2015.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:



	December 31,
(in millions)	2016				2015
Deferred tax assets:
Other comprehensive income		$409				$241
Allowance for credit losses	471				465
State net operating loss carryforwards	75				137
Accrued expenses not currently deductible	129				135
Investment and other tax credit carryforwards	52				—
Deferred income	22				40
Fair value adjustments	40				36
Other	—				5
Total deferred tax assets	1,198				1,059
Valuation allowance	(107		)		(123		)
Deferred tax assets, net of valuation allowance	1,091				936
Deferred tax liabilities:
Leasing transactions	881				882
Amortization of intangibles	522				455
Depreciation	234				213
Pension and other employee compensation plans	103				69
MSRs	49				47
Other	16			—	—
Total deferred tax liabilities	1,805				1,666
Net deferred tax liability		$714				$730

At December 31, 2016, the Company had state tax net operating loss carryforwards of $1.4 billion. Limitations on the ability to realize these carryforwards are reflected in the associated valuation allowance.

At December 31, 2016, the Company had a valuation allowance of $107 million against various deferred tax assets related to state net operating losses and state tax credits, as it is management’s current assessment that it is more likely than not that the Company will not recognize a portion of the deferred tax asset related to these items. The valuation allowance decreased $16 million during the year ended December 31, 2016.

Effective with the fiscal year ended September 30, 1997, the reserve method for bad debts was no longer permitted for tax purposes. The repeal of the reserve method required the recapture of the reserve balance in excess of certain base year reserve amounts attributable to years ended prior to 1988. At December 31, 2016, the Company’s base year loan loss reserves attributable to years ended prior to 1988, for which no deferred income taxes have been provided, was $557 million. This base year reserve may become taxable if certain distributions are made with respect to the stock of the Company or if the Company ceases to qualify as a bank for tax purposes. No actions are planned that would cause this reserve to become wholly or partially taxable.

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state and local income tax examinations by major tax authorities for years before 2013.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is presented below:



	December 31,
(in millions)	2016			2015			2014
Balance at the beginning of the year		$62			$72			$33
Gross decrease for tax positions related to prior years	(19		)	(6		)	—
Gross increase for tax positions related to prior years	1			—			60
Decreases for tax positions as a result of the lapse of the statutes of limitations	(2		)	(3		)	(1		)
Decreases for tax positions related to settlements with taxing authorities	—			(1		)	(20		)
Balance at end of year		$42			$62			$72

Included in the total amount of unrecognized tax benefits at December 31, 2016, are potential benefits of $29 million that, if recognized, would impact the effective tax rate.

The Company classifies interest and penalties related to unrecognized tax benefits as a component of income taxes. The Company accrued $8 million, less than $1 million, and $1 million of interest expense through December 31, 2016, 2015, and 2014, respectively. The Company had approximately $22 million, $14 million, and $15 million accrued for the payment of interest at December 31, 2016, 2015, and 2014, respectively. There were no amounts accrued for penalties as of December 31, 2016, 2015, and 2014, and there were no penalties recognized during 2016, 2015, and 2014.