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Financial Planning > Tax Planning > Tax Reform

Tax Reform Is Coming. But First ...

By Melanie Waddell

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While members of the House Ways and Means and Senate Finance committees are gearing up to craft tax reform legislation based on the GOP unified tax reform framework released Wednesday, lawmakers must first pass a budget.

“In the most immediate term, it’s passing a budget that provides our runway to land tax reform,” said House Ways and Means Committee Chairman Kevin Brady, R-Texas, on Thursday at The Heritage Foundation in Washington.

Tax reform “work cannot begin seriously without a budget,” Brady said, adding that Ways and Means “will continue to listen as tax reform moves through regular order, taking feedback from the American people and from our fellow Republicans in Congress,” along with “participation and partnership of Democrat colleagues.”

Greg Valliere, chief global strategist for Horizon Investments, noted in his Thursday commentary that the outline released Wednesday is not “definitive,” rather, it “simply begins negotiations on several key provisions that may be altered in coming months.”

The big news for the markets: “Tax cuts are very much alive and should clear several key hurdles this fall,” Valliere said.

What to watch? First, progress on procedural hurdles, Valliere said, “starting with a budget resolution, then hearings on the tax bill in the Ways and Means Committee, and markup of a bill that could get to the House floor by Thanksgiving.”

The House will vote on a 2018 budget resolution next week, House Budget Committee Chairman Diane Black, R-Tenn., said Thursday, as reported by The Hill.

Valliere sees progress in October, as “the House Freedom Caucus, so frequently obstructionists, announced yesterday that it will not oppose this process.”

Also important, however, is to watch how “strong will the pushback be on the state and local tax break, on the overall cost of the bill, on a potential tax cut for the wealthy, on the estate tax, on a possible negative for housing, etc.” Valliere said.

The initial GOP tax proposal “now enters the spin zone,” Valliere asserts, “and the reaction – from the media, lobbyists, tax experts and ordinary voters – will be crucial. Watch the polls.”

Valliere sees “plenty of changes” as likely to the GOP outline. “In this new populist climate, we simply do not see a 35% top rate in the final bill. The horse trading will continue in the Senate late this year and in a House-Senate conference committee in early 2018; the issue of deductibility of debt alone could take weeks to resolve.”

So what should investors do? “Focus on the big picture: the details may be in flux, but a tax cut of at least $1.5 trillion is likely, with significantly lower rates for corporations and pass-through firms, and modestly lower rates for individuals,” Valliere said.

The markets, he continued, “will like the final bill; they have rallied on the expectation that lower tax rates and stronger GDP are coming, and both of those outcomes still seem likely.”

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