The US Senate released their version of tax reform this week and it shows some, but not perfect, alignment with the House version released earlier. Assuming each governing body passes their respective versions, the next step is for a bicameral committee to convene and work out the differences. Republicans in the United States are more motivated than ever to get some legislative points on the score board. The failing to accomplish major campaign promises in the first year of a united executive and legislative branches is raising the question of how long the single-party control can last. Media has heralded the Democratic wins in the 2017 off-cycle elections held predominately this week as a referendum on the Trump-led Republican party. How many big Republican donors are going to return fundraising phone calls if there is not a success with tax reform after failure in repealing the Affordable Care Act, and missteps on immigration? There is motivation for action, but the proposals so far have a little something for everyone to hate. Expected reductions in personal income taxes extends up the income bracket to families making multiples of the national average which may inflame criticism of tax breaks for the “rich.” On the other side, in the House version those making over $1mm of income (the top bracket their proposal) do not see a reduction in the marginal tax rate and face limits on the deductibility of items like property taxes which may in the end increase their overall tax bill. Eliminating state and local tax deductions affects most states, but in particular high tax states like New York and California further entrenching their opposition.
Meanwhile, most economists expect that the economic boost comes primarily from change to corporate taxation. A reduction of the corporate tax rate to 20% (which is likely to be adjusted higher by the end of negotiations) is more of an acknowledgement of the effective tax rate paid by many companies rather than a transformational change. It does affect equity sectors differently as some industries (like technology) are better able to offshore income than other industries that are domestically tied (like energy). Proposals around how the tax system would work going forward for earnings and assets outside the US also will affect more globally oriented companies. All of that said, a Bloomberg survey of economists put a range of economic boost from the package at between slightly positive to +0.9% with a median estimate of +0.25%. That is not inspiring, though we are sure Republicans are banking on an underestimate of impact similar to what occurred from the Bush tax cuts. Should the Senate get their way of delaying the effect of approved changes to 2019, the Republican party may not get the political benefit even if the boost is greater than expected.