US tax reform: Latest developments in Washington - Nomura

According to Nomura's Economics Team, despite last-minute negotiations, they expect a final passage of the US tax bill by year-end, likely by the end of this week.

Key Quotes

On Friday, Republicans signed the conference report that reconciled the House and Senate tax bill passed by each chamber. Despite last-minute negotiations, we continue to expect final passage of the tax bill by year-end, likely by the end of next week. The House and Senate will both need to vote on the conference bill, the text of which should be released this evening, before the final legislation can be sent to President Trump.

On Thursday, House Speaker Ryan (R-WI) indicated that Congressional Republicans will seek to use budget reconciliation, the vehicle for tax reform and the attempted repeal and replacement of the Affordable Care Act (ACA), to reform the US entitlement system in 2018, focusing in particular on welfare programs. Thus, government programs and fiscal policy could again take center stage next year.

Next week, Congress will need to extend the government’s spending authority beyond Friday to avert a government shutdown. This deadline was the result of the temporary two-week extension passed last week. After taking care of tax reform at the beginning of the week, we expect Congress to pass another continuing resolution that will extend the spending authority into January 2018. This should provide more time to negotiate a longer-term spending agreement. Note that the debt limit will also need to be addressed sometime in Q1 2018, with more uncertainty than usual around the projected X-date.1 Democrat Doug Jones won Alabama’s special election for US Senate, defeating Republican Roy Moore in a state that President Trump won by 28pp in the presidential election.

Jones’ victory narrows the Republican majority in the Senate to 51-49. It may also be a troubling indication for Republicans’ prospects in the 2018 congressional midterm elections. Similarities between the 2010 and 2018 election cycles are becoming increasingly apparent: roughly a year before the 2010 (2018) midterms, Democrats (Republicans) lost a special senate election in Massachusetts (Alabama), after President Obama (Trump) had won the state by 26pp (28pp) just a year earlier. The 2010 midterms turned into a wave election for Republicans, shifting control of the House. Importantly, this week’s election in Alabama indicates that President Trump’s ability to empower his preferred candidates to victory may be limited.