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Government Shutdown Could Roil Markets, Tax Cuts Still Doable: Friedman

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The prospect of a government shutdown could roil the markets, at least in the short term, much like Republicans’ failure to pass legislation to replace the Affordable Care Act led to “the largest one-day drop in the market since the election,” according to political watcher and former tax attorney Andy Friedman.

If Congress fails to pass appropriations legislation to fund the government by April 28, the markets “could retreat,” Friedman of The Washington Update notes in a recent commentary. Beyond that date, on April 29 the government will shut down.

An appropriations bill requires 60 affirmative votes in the Senate to overcome a filibuster. “Because the Republicans hold only 52 Senate seats, some Democratic support is necessary for passage,” Friedman explains. “President Trump is calling for cuts in domestic spending, as well as the appropriation of additional funds to build a wall on the U.S.-Mexican border. Democrats have indicated they will oppose these objectives.”

As JEF Economics notes, while government shutdowns tend to be temporary, most civilian government employees are furloughed during such times, most government agencies that provide services to the public are closed, and national parks, monuments and museums are all closed. “In essence, a government shutdown is a huge inconvenience for the public that generates pressure on the politicians obstructing the passage of the funding bills to yield.”

If a shutdown were to occur, “the next most likely course of action would be to pass a short-term” continuing resolution to fund the government, JEF opined. 

As for tax reform, which looks to be in trouble, businesses, Friedman continues, are also “looking forward to tax reform legislation that would cut their tax rates.”

Treasury Secretary Steven Mnuchin’s comments to the Financial Times on Monday show that tax reform passage this year is in doubt.

“We’ve argued for weeks that tax reform won’t win enactment in 2017, and now [Mnuchin] has dialed back his widely panned forecast of passage by the August break,” said Greg Valliere, chief global strategist at Horizon Investments, in his Tuesday commentary.

Mnuchin told the FT tax reform “will take much longer, and he conceded that there are stumbling blocks: there’s no consensus – even within the White House – on whether the bill should be revenue-neutral or whether there should be a border adjustment tax,” Valliere said.

But Friedman told ThinkAdvisor on Tuesday that despite Mnuchin’s misgivings, he still believes the Republicans “will get a tax bill that reduces rates through Congress this year. Failure to do that would be too embarrassing. Whether the bill rises to the level of full-scale tax reform at this point though is uncertain.”

Unlike the government appropriations bill, tax legislation “requires only 51 affirmative votes in the Senate and thus may be passed without any Democratic support,” Friedman said.  

Valliere opined that a tax reform bill could “come into focus by late fall,” with Trump’s top economic advisor, Gary Cohn, “making a big difference.”

Tax reform, Valliere continued, could “win enactment a year from now – but this enormous task has encountered two fresh obstacles: the growing call for Trump to release his taxes, and the public opposition to the GOP Obamacare replacement bill, which is increasingly radioactive; Republican lawmakers are sprinting away from the measure. Without the revenues from this health bill, tax cuts are less likely.”

— Check out Trump Pledges to Cut Regulations by 75%, Will Face Hiccups in Congress on ThinkAdvisor.