The tax bill passed by Republicans in the U.S. Senate over the weekend may boost profits for industries from banking to retail to fossil fuels. It also could put the squeeze on hospitals and renewable energy firms.
While the plan is still subject to revision, the centerpiece of the existing legislation is a reduction in the corporate income tax rate to 20% from the current 35%, along with a provision that allows some companies to bring back hundreds of billions of dollars in foreign profits at a lower rate than they otherwise would’ve paid.
The Senate bill preserves the alternative minimum tax for corporations after originally proposing to eliminate it. With the regular corporate rate now set to drop to 20% — the same as the corporate AMT — it’s unclear if companies would be able to use research and development credits to lower their tax bills.
The bill, which underwent a raft of last-minute changes late Friday and early Saturday before passage, may still see more alterations as Senate and House leaders begin work to reconcile their two versions. President Donald Trump also weighed in Saturday, unexpectedly saying the corporate tax rate in the package could reach 22%.
Here’s how sectors may fare under the legislation as it stands:
Stocks of U.S.-based asset managers rose to a record last week on optimism about the tax overhaul. Among the top gainers were Federated Investors Inc., Bank of New York Mellon Corp., Franklin Resources Inc., Waddell & Reed Financial Inc. and Eaton Vance Corp.
That’s in part because asset managers typically pay tax rates of 30% to 35%, according to data compiled by Bloomberg. It’s higher than many other industries because the firms generally qualify for few deductions, Gabelli & Co.’s Macrae Sykes said last week.
Assets managers also benefit from rising equity markets, as higher prices increase the value of the holdings they manage and improve the performance of their funds.
Asset managers with foreign earnings could see particular benefits from the Senate bill, according to Rory Callagy, a senior vice president with Moody’s Investors Service.
As a group, they’d also gain from the bill’s tax cuts for individuals — as well as changes to the alternative minimum tax and restrictions on the estate tax. Those provisions would give individual investors “more of their income and inherited wealth” to put into mutual funds and exchange-traded funds, “helping managers grow assets and related fees,” Callagy wrote.
Lenders including JPMorgan Chase & Co. and Citigroup Inc. have rallied on news of the bills’ progress in Congress. “Banks would be one of the clearest beneficiaries of this tax reform bill,” Isaac Boltansky, an analyst at Compass Point Research & Trading in Washington, said in an email early Saturday after the Senate amended the bill.
If Republican promises of faster economic growth are realized, banks will benefit with corresponding loan portfolio expansion, Boltansky said. Moreover, as corporations that pay relatively high effective tax rates themselves — with fewer available deductions — banks also stand to benefit a great deal from the reduced overall rate.
Banks would pay slightly higher rates than other types of companies under a new tax on certain payments to overseas affiliates. However, they’d benefit from a last minute change to another aspect of the so-called base erosion anti-abuse tax, or BEAT, which stipulated that payments involving derivatives wouldn’t count toward triggering the levy.
Another provision would eliminate the deduction for Federal Deposit Insurance Corp. premiums by banks with consolidated assets above $10 billion.
Drug and biotechnology companies would be among those benefiting from paying a reduced tax rate on repatriated earnings.
The money isn’t likely to go to workers, though. Senior executives from Pfizer Inc. and Amgen Inc. have said they’ll use a lower tax rate and cash inflow to return money to shareholders through buybacks and dividends. The new tax regime could also set off a mergers-and-acquisitions boom, as flush war chests give large drugmakers the means to snap up assets they’ve had their eyes on.
The Senate bill’s repeal of Obamacare’s individual mandate won’t help health insurers and hospitals, which are already working to cope with the Trump administration’s efforts to undermine the law. Ending the individual mandate — a requirement that all Americans carry health insurance coverage or pay a fine — is likely to raise the number of uninsured.
For health insurers, that means the only people who will buy coverage are those that need it most — typically sicker, more costly patients. In response, many have already started to raise the premiums they charge, or to pull back from some of the law’s markets.
Hospitals have less flexibility. Any increase in the uninsured means a decrease in the number of paying customers. Sick people still show up at the emergency room for care, though, and hospitals often have to write off their unpaid bills.
Because of their use of leverage to juice returns, private equity firms are primarily watching proposals to limit the amount of interest expense they can deduct from portfolio companies’ taxable income.
House Republicans’ bill would cap the deduction at 30% of a company’s earnings before interest, taxes, depreciation and amortization. The cap in the Senate bill is stingier at 30% of earnings before interest and taxes — a much lower measure than Ebitda. The firms can currently saddle their companies with debt and deduct the full interest cost.
Dealmakers are also watching a potential change in how their personal earnings are taxed. Currently, their cut of profits on private equity investments made using client capital is treated as a long-term capital gain — and taxed at a lower rate than ordinary income — if the investment is held for at least a year. Both the House and Senate bills would lengthen the one-year standard applied to such earnings, known as carried interest, to three years.