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Wall Street has been eagerly looking forward to corporate tax reform since President Donald Trump’s election Trump and congressional Republicans, however, have chosen to work on overhauling the US healthcare system first, an effort that has run into some stumbling blocks Delays in healthcare reform could lead to delays in tax reform, which could threaten recent gains in the stock market
Tax cuts have been at the top of Wall Street’s wish list of policies to come out of President Donald Trump’s administration.
While administration officials have been promising that cuts to corporate and personal taxes are coming soon, investors have had relatively little to grab onto in terms of details of a plan.
And the recent fight over healthcare reform has added to these concerns.
The Republican bill to repeal and replace the Affordable Care Act, the healthcare law better known as Obamacare, has taken the front seat in the legislative agenda for Trump and the GOP, sidelining hopes for a major tax-reform initiative until after the plan has been passed.
With delays and possible roadblocks looming for the reform bill, the American Health Care Act, there has also been growing doubt that tax reform is coming as quickly as the Trump administration promised, and analysts think delay could make investors jittery.
The Trump administration has long taken the stance that it wants to significantly cut taxes for businesses.
Trump expressed his desire as far back as September 2015 to cut corporate taxes to 15%, and he frequently brought the issue up on the campaign trail.
After being elected, Trump also told airline CEOs that he wanted to slash the current federal statutory corporate tax rate of 35% to about 15% to 20%.
While few companies actually pay the full statutory rate – JPMorgan has estimated that US corporations pay an effective rate of about 20% after tax credits – a cut could certainly reduce a significant expense and lead to larger profits for corporations.
While Republicans have been advocates of lower corporate rates for decades, Trump’s election and the timeline set out by the president have encouraged investors that the tax cut could be coming soon.
The timeline for the tax proposal has been ambitious. During a meeting with manufacturing CEOs on February 9, Trump said he was “going to be announcing something over the next, I would say, two or three weeks that will be phenomenal in terms of tax.”
Five weeks later, a full plan has not been released.
Other Trump administration officials have also promised that the reform is on the way. Treasury Secretary Steven Mnuchin told CNBC that he wanted new tax policy to be signed by Trump in time for Congress’ August recess.
Given the strong words, investors have been getting more bullish on stocks’ and companies’ prospects, but the healthcare overhaul could dampen those hopes.
Checking the calendar
The hang-up for tax policy seems to be coming from the GOP’s desire to redo the Affordable Care Act first.
Trump said in a speech in Nashville, Tennessee, on Wednesday that he wanted to “cut the hell out of taxes” but that there was a problem.
“But, but before I can do that – I would’ve loved to have put it first I’ll be honest – there’s one more very important thing that we have to do,” Trump said. “And we are going to repeal and replace horrible disastrous Obamacare.”
Republicans are using a process known as budget reconciliation to pass the AHCA. This means they need only 50 votes in the Senate to pass the bill and avoid a Democratic filibuster. It also means they can change only parts of Obamacare directly dealing with the federal budget, and since they are amending the fiscal-year 2017 budget, they have to get the process done in the next several months.
But the AHCA is broadly unpopular across the political spectrum. Conservative and moderate Republicans as well as Democrats, conservative think tanks, major medical associations, and, according to polling, a majority of Americans oppose the AHCA in its current form. So, Wall Street is worried a delay for the AHCA may be coming.
A vote on the bill by the House is expected later in the week, and there’s a real danger of the act not passing unless substantial changes are made to appease conservative members of the House Freedom Caucus. The head of the Freedom Caucus, Rep. Mark Meadows, told reporters he had 40 to 50 votes against the current form of the AHCA, which would be enough to block the bill.
That would push back the tax-reform changes Wall Street so desperately wants, according to Compass Point analyst Isaac Boltansky.
“Assuming no Democratic support, GOP leadership can only lose 21 of its 237 seats and still pass the AHCA,” Boltansky wrote in a note to clients on Monday.
Boltansky also wrote: “Notably, during an interview that aired on Sunday, House Freedom Caucus Chair Meadows (R-NC) estimated that ~40 House Republicans were still opposed to the measure. If AHCA fails, or continues to dominate the agenda well into 2Q17, the market will likely be forced to begin discounting the prospects of tax reform and other fiscal policy changes.”
JPMorgan’s Adam Crisafulli said the AHCA vote could not only delay tax reform but also signal to investors just how likely it is that the tax overhaul will get passed. From Crisafulli’s Monday note to clients (emphasis added):
“The biggest event by far for equities will be the House floor vote on Ryan’s HC bill (scheduled for Thurs 3/23) – failure to advance this legislation would likely materially undermine market confidence in the GOP tax reform agenda. The fact Ryan even scheduled a vote suggests some confidence on his part in being able to secure passage although this is by no means guaranteed. Even if Ryan manages to get his bill out of the House, passage in the Senate appears very unlikely which raises the larger issue of how much time and political capital Republicans wind up devoting to this issue at the expense of more market-friendly initiatives (namely tax reform).“
By many measures, the recent run in stocks has pushed the market into expensive territory if there is not a serious uptick in earnings.
One of the drivers of the recent stock rally, according to analysts, is the baked-in expectation that lower tax rates will increase corporate profitability.
So for investors, the failure of Trump and the GOP to pass the AHCA could signal a longer and possibly nonexistent road to tax reform.
To be fair, healthcare and taxes are two different beasts, and support within the Republican Party will probably not line up similarly on both issues. A major delay on tax reform, however, could seriously wound the recent surge in investor confidence.