Close Close

Financial Planning > Tax Planning > Tax Reform

5 Reasons Tax Reform Is Still Alive

Your article was successfully shared with the contacts you provided.

If health care reform stalls, will tax reform stall with it?

Lawmakers and industry officials say no, with LPL Financial predicting an upcoming “pivot” toward tax reform.

Indeed, House Speaker Paul Ryan said so recently while making the case for a tax overhaul.

“We will do tax reform no matter what happens with any other issue like health care reform because we know we have to do tax reform,” Ryan said on July 21 to employees at a New Balance factory in Lawrence, Massachusetts. “It’s a once-in-a-generation opportunity.”

In his Tuesday commentary, Burt White, LPL Financial’s chief investment officer, stated that Republicans’ latest unsuccessful attempt to reform health care signals “we are closer to the pivot toward tax reform.”

Despite challenges, LPL, he said, continues “to expect a tax deal to get done in early 2018 that may provide a nice boost to corporate profits and could help to support stock valuations.”

The likelihood of the health care “status quo” surviving has “important implications for the health care sector, which should benefit from spending remaining at elevated levels,” White opined.

The likely “impending finality” on health care, he continued, “should open the door to tax reform negotiations.”

If the Republicans can’t get a health care deal done, “why would tax reform — also divisive and complex — be any different?” White asked.

Because tax reform is different, White said, for these reasons: 

  1. The pressure is on. Considering the midterm elections in 2018 are just 15 months away, pressure is on legislators to act on plans to improve economic growth. The experience to date on health care only adds to the urgency Republicans must feel to deliver on their campaign promises and achieve a big political win with control of Congress and the White House.
  2. More unity. Republicans in Congress are more united on tax reform than health care, and [LPL has] more confidence in the Trump administration’s ability, led by Treasury Secretary Steven Mnuchin and Chief Economic Advisor Gary Cohn, to lead on this issue.
  3. Progress has been made. [LPL's] primary contacts in Washington have indicated that substantial work on taxes has already been done.
  4. Bipartisan support for repatriation. One of the challenges with lowering the corporate tax rate is replacing the lost revenue to limit budget impact. A reduction in the tax rate companies must pay to bring overseas cash back to the U.S., which enjoys bipartisan support, could generate $150 billion or more in additional tax revenue over 10 years.
  5. Dynamic scoring. Dynamic scoring allows policymakers to assume an incremental growth impact, and more tax revenue, from the reduced tax rate that can be used to offset the cost of lowering the rate. Republicans may also be able to change the budget baseline to facilitate revenue-neutral scorekeeping (revenue-neutral policy is required under reconciliation, which is the legislative maneuver necessary to get tax reform through Congress with only a simple majority rather than the standard 60-vote requirement).

The reasons cited likely cement a tax deal making it to President Donald Trump’s desk and signed in early 2018, White predicts, “before the midterm election campaign season heats up.”

Greg Valliere, chief global strategist for Horizon Investments, also recently said that he fields questions almost daily on the likely effective date of a new tax bill. His answer: “No one knows for sure. Our best guess — an effective date of next April 1, but we wouldn’t rule out July 1. An effective date anytime in calendar 2017 seems unlikely.”

LPL’s White points to challenges that suggest a tax deal is far from certain.

First, a budget bill “must be passed, and that effort is complicated by divisions within the Republican Party around spending cuts. Finding revenue offsets is even tougher with federal health care spending remaining at prior elevated levels. And, the legislative calendar is crowded, especially if health care remains on policymakers’ plates,” White writes.

LPL anticipates a corporate tax rate around 25%, down from the current 35%, as achievable, though above previous proposals from Trump and House Republicans of 15% and 20%, respectively.

“A 25% rate still may be enough to potentially push S&P 500 profits 5% higher in 2018 to north of $140 per share, even without reforming individual taxes (though that may come too),” White said.

Senate Finance Committee Chairman Orrin Hatch, R-Utah, said in July 20 comments on the Senate floor that shifting to a territorial tax system “would modernize our tax system and help make American companies more competitive in the vast global marketplace, incentivize American companies to bring overseas earnings back to invest in their domestic operations, and eliminate incentives to keep money abroad.”

Said Hatch: “By clinging to its worldwide tax system and a punitively high corporate tax rate, the U.S. has severely diminished the ability of its multinationals to compete in the world marketplace. Because U.S.-based companies are subject to worldwide taxation while their global competitors are subject to territorial taxation systems, U.S. companies all too often end up having to pay more taxes than their foreign competitors, putting them at a distinct competitive disadvantage.”

Hatch stated that members of Congress from both parties support a shift to a territorial tax system. The idea, Hatch added, was also included in the Trump administration’s principles for tax reform and is “part of the conversation in current tax reform efforts.”

— Related on ThinkAdvisor: