Delegates from the U.S. House and Senate are set to begin meeting in a conference committee this week to work out the differences in the tax reform packages passed by the two chambers with the goal of getting a final bill to President Donald Trump's desk before the end of the year.
The House is expected to vote to establish the committee the evening of Dec. 4.
The Senate's version maintains the corporate and individual alternative minimum tax eliminated in the House plan and phases out the 100% expensing provision rather than letting it expire in 2022. It also increases the deduction for pass-through entities to 23% from the 17.4% proposed in the chamber's original plan, and it adopts the House bill's treatment of state and local tax deductions by capping deductions at $10,000 for property taxes.
The Senate and House will have to reconcile their different tax brackets along with their plans for the alternative minimum tax. The Senate will likely have the upper hand in shaping the bill in conference, according to a research note from Compass Point Research & Trading LLC.
"Generally speaking, our sense is that the final conference committee report is likely to skew toward the Senate's version given the narrower margin in the upper chamber," the note reads. "The conference committee process could be volatile, but we expect it to move quickly and odds favor the president signing a bill this year," the report noted. "We maintain our 75% odds of a tax bill passing, but those odds are biased higher and will likely move upward once the conferee list is released."
Lawmakers have heralded the passage of the bills in both chambers as a step toward stimulating economic growth, despite skepticism that the bill may not have much of an effect.
"While we acknowledge there will be a boost, coming up with a figure is very challenging and we feel more comfortable erring on the side of caution," ING Research said in a note. "While the tax cut for corporates is substantial we have to recognize that the effective rate that most paid was significantly lower than the 35% headline rate due to deductions and credits they could use to legitimately cut their tax bill … Moreover, the repatriation of overseas earnings will only occur at the prevailing tax rate — there won't be a special incentive. Therefore the net cashflow boost may be smaller than some commentators are factoring in."
The analysis also highlights how the Federal Reserve will track the plan and what growth it produces. According to ING, the Fed will be more inclined to raise interest rates given the current 3% growth rate, even though policymakers have reacted cautiously thus far.
The bill will have mixed implications for banks while acting as a net positive for asset managers and insurers, according to analysts from Moody's Investors Service.
"Lower tax rates will increase banks' profitability, but higher profits may benefit shareholders more than creditors if dividends or share buybacks also increase," said Celina Vansetti-Hutchins, managing director, Moody's Investors Service in a note. "Lower tax rates will result in one-time write-downs of deferred tax assets, and home values may face downward pressure, with a potential negative effect on banks' mortgage loan books and a modest second order negative impact on other consumer loans."
Asset managers will likely benefit from lower top personal rates and changes to the AMT and estate tax since higher-income investors would be more likely to invest more of their income in mutual funds.
