US: Increased likelihood of tax legislation this year - Nomura

The likelihood that US Congress will pass a major tax reform package by the end of 2017 appears to have increased, according to analysts at Nomura.

Key Quotes

“We have long held that the current Congress would pass some sort of tax package. However, recent events suggest that tax cuts could come sooner, and be larger, than we had expected. In particular, the probability that in the next few weeks Congress will pass a tax bill that is very similar to the current bills being considered in the House and Senate has increased.” 

“Several recent developments have increased the likelihood that a major tax bill will be passed this year. First, the Republican caucus has an increased sense of urgency to pass tax legislation following the failure on health care reform and after recent elections in Virginia and other areas, where Democrats won up and down the ballot.” 

“Second, recent accusations against Roy Moore, the Republican candidate, have tightened the special election to permanently fill the Alabama Senate seat formerly held by Attorney General Jeff Sessions. Luther Strange, a Republican, was appointed to fill Session’s seat until a special election could be held on 12 December. If a Democrat wins the Alabama senate seat, the Republican senate majority would fall to 51-49 from an already-slim 52-48, increasing the difficulty of passing tax reform. Thus, we believe the Republican leadership now feels increased pressure to pass tax reform quickly. Also, if a tax bill passes the Senate in the next few weeks, the Republican leadership in Congress may simply ask the House to vote on the bill that the Senate approved instead of going through a timelier process that would involve a conference committee.” 

“Finally, we have been surprised at the lack of push back on the House and Senate plans from Republican deficit hawks: members that have previously highlighted concerns over future deficits and debt. Further, industry groups, aside from housing, have largely restrained their criticism after changes were made to earlier drafts of the legislation.”

“Nonetheless, significant uncertainty and major hurdles remain. It is important to note that tax reform is not the only issue that Congress has to consider. Congress has to address a large number of substantive and controversial issues in the next few months.”

“Taken together, we now think that there is roughly a 50% likelihood that Congress passes a major tax reform package by end-December. We expect such a tax package to be broadly similar to what the Senate Finance Committee has passed, including lowering the top corporate rate cut to 20%; net tax cuts on the personal side, many that would expire in 2025; and a territorial-style international tax system. However, many details of the plan remain in flux. For example, the Senate will likely have to preserve a portion of the state & local deduction in order for the bill to pass the House. Also, the Senate may drop the provision that repeals the Affordable Care Act’s (ACA) individual mandate.”