The year is quickly coming to a close, but that does not mean it will necessarily be boring. Spurred by the loss of a Republican seat in the Senate in the Alabama special election, the GOP lined up their party line and completed tax reform this week. Today, President Trump signed it into law. Relative to other tax overhauls of this scale, it was quick and dirty. Last minute clause swapping to garner final votes leaves many uncertain as to what is actually in the package even as it is signed into law. The Washington Post did an interesting analysis on the 504-page bill which was attended by about 600 pages of what is called a “conference report.” Noting that it is difficult to read the actual language of a bill and follow what is happening since basically it reads “Strike X in subparagraph 1 and insert Y in subparagraph 2 subsection 3” they suggest that legislators would focus on the conference report and sought to determine whether it was likely that anyone could have read it. A conference report puts a bill into traditional paragraphs that someone can read, but that makes it longer. It contained almost 232,000 words. Using the time-frame of a late Friday release of the conference report and assuming 8 hours of sleep each night and an average reading pace until when the House voted on Tuesday, a Congressperson would have to dedicate over 40% of their waking hours just to reading the bill. Possible but not terribly realistic. The US public may not be the only ones still trying to figure out exactly what is in the bill.
The US equity market does not let a little thing like details stand in its way though. It continued its rally on the legislation anticipating a boost to earnings next year. Consensus estimate for the impact to S&P 500 earnings is in the +7-8% range. Domestic industries benefit the most. The US onshore energy sector took a noticeable trend higher. Energy stocks have lagged both the broader equity market and the commodity price this year. Perhaps an earnings boost from tax changes was just the little bit of catalyst needed for contrarians to step in to the lagging sector.
Estimates for the economic impact are positive, but vary from near nothing to +1% in 2018. Republicans are hoping that the GDP growth increase will be much bigger than forecasted (similar to what happened from the 2003 tax cuts) to improve public opinion on the bill. It needs to be bigger if they expect to keep their jobs in the next mid-year election. This process was deeply partisan and rushed. Unintended consequences or a lack of economic boost will weigh heavily on voters. While changes in corporate tax rates and accelerated depreciation may spur investment near-term, we may not see as big of a boost to economic growth if consumers feel that any reduction in taxes is a temporary windfall. If so, history has shown that a consumer will prefer to save over spend.