US: Tax reform is raising expectations – Goldman Sachs

According to Alec Phillips, Research Analyst at Goldman Sachs, the US tax reform debate is moving forward faster than they or most other observers expected and while there are a number of issues that could still slow it down, or stop it altogether, they believe the odds that tax reform will be enacted by early 2018—already our base case—have risen to 80% (from 65% previously).

Key Quotes

“Pushback from affected industries, a narrow vote margin in the Senate, and keeping the overall cost of the package under the $1.5 trillion limit imposed by the budget resolution remain challenges and we believe there is still a chance that these issues could slow the bill down or stop it altogether.” 

“However, recent positive developments appear to outweigh those risks. First, official cost estimates for the House and Senate bills suggest that key provisions would cost less than previously expected, including a 20% corporate income tax. Second, political opposition to substantial limits on state and local tax deductibility has been modest, allowing for greater-than-expected base-broadening. Third, centrist Republicans appear to be receptive to the recent Senate proposal. If this remains the case, we would expect the bill could win 51 votes in that chamber.”

“That said, there are many details still to be resolved.  We expect a slightly small cut to individual tax rates offset by slightly less individual base-broadening in order to accommodate separate political needs in the House and the Senate.  The tax cut on pass-through income looks likely to follow the slightly smaller Senate proposal, in our view.  A 20% corporate tax rate looks attainable but might still need to be phased in to contain the cost, in our view. Limitations on net interest deductibility look more likely to follow the less restrictive House version, we believe, while changes to international corporate taxation look more likely to follow the Senate’s proposals.”

“We expect the House to pass its tax bill later this week. The Senate is only a week behind the House, with the Senate Finance Committee likely to pass its tax reform proposal later this week as well. Full Senate consideration looks likely in early December.  The most likely scenario after that is a House-Senate conference committee, which seems likely to take until early 2018 to resolve, though we believe there is around a one-in-three chance that the bill could become law before year-end.”