Off the Cuff: Policy Musings from Washington DC

Last week our Strategy Team attended a virtual DC Policy Conference hosted by one of our longstanding research partners. The event was hosted on January 7th, shortly after the conclusion of the Georgia Senate elections and the unfortunate incident at the Capitol complex. The following is a concise summary of our takeaways from the conference but caution investors from making swift decisions based on the information below. The obvious direction for taxes is higher at both the corporate and personal levels, but as we say, “the devil is in the details.” Even under a Democrat administration we are likely to see policy converge to the center. We segmented each section into relevant topics that are likely to influence our client base in 2021 and beyond. To compliment this, please look for our 2021 Financial Planning Guide and our Quarterly Outlook, both to be released in January.

Individual Tax Rates:

  • The potential elimination of the 37% tax bracket is being discussed; the tax brackets would jump from 35% to 39.5%.
  • Expect the line denoting “high earners” to start somewhere between $400k and $550k in annual income.
  • It is suspected that Democrats will reinstate some level of state and local tax deductions again – perhaps not to the same extent as prior but will help to offset higher personal taxes. There is also recognition that too many people are leaving historically Blue states.
  • There is a possibility that long-term capital gains and dividend tax rates increase to 25% or 28%. The increase won’t generate significant revenue, but Democrats believe a higher tax rate closes the income inequality gap. This is a lower probability but will be under consideration.
  • Changing the estate tax in a 50/50 Senate is still challenging. Farmers and small businesses pay this tax and there are strong lobbying groups for both. As an alternative, there are some discussions of a carryforward cost basis versus a step-up in cost basis for tax calculations.

Corporate Tax Rates:

  • Democrats believe that the corporate tax cut in 2017 had little impact on GDP growth, therefore some roll-back in the rate is likely.
  • A 25% (from 21%) corporate tax rate is being discussed, while President-elect Biden is lobbying for 28%.
  • Will see an increased tax on intellectual property held by US companies oversees – could be a doubling of the existing tax.

Climate Change:

  • Renewable energy is arguably the biggest winner in a Blue administration.
  • We will see the “biggest shift to renewables that we have ever seen from an administration”, above what occurred under former President Obama.
  • Climate change will be integrated into all foreign policy goals.
  • Areas of focus include building modernization, EV, solar/wind investments.
  • A weaker dollar may be a tailwind for higher oil prices, despite the emphasis on renewables.

Specific Industry Comments:

Healthcare:

  • There is a risk of lower reimbursements rates on Medicare B.
  • Drug pricing may continue to see headwinds but likely consistent with recent years.
  • Managed care will have headline risk, but a split Senate makes strong healthcare reform challenging.

Financials:

  • Steeper yield curve will broadly help the sector.
  • Will see non-bank regulations increase.
  • Climate change will be a component of future regulations and US banks are concerned over expenses.

Industrials:

  • Renewables and energy efficiency will be a major investment theme.

Defense:

  • Likely to face administration and fiscal headwinds, hard to imagine additional increases to the defense budget given the existing deficit.

Technology:

  • The lawsuits are likely to continue under a Blue administration.
  • Important to highlight that while the technology sector has faced regulatory pressures for 4 years, the stocks have been great performers.
  • Small cap tech may be a winner and stand to benefit from market share gains from their large cap peers.

Infrastructure:

  • Will be a major focus by a Democratic administration, we are “nowhere close” to meeting carbon goals by 2050.
  • Areas of focus: transmission lines, mass transit, charging stations – broad investment is needed.
  • Popular due to job creation and overall need

 

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