Bad News For Wall Street: No Tax Reform Until Fiscal 2018, McConnell Warns

As explained, most recently two days ago, the key reason Wall Street is concerned about the complications involving Obamacare's "repeal and replace", which now appears will be stuck in Congress for a long time following vocal opposition from various conservative groups and outside lobby interests, is that it will delay tax reform. As Goldman laid it out over the weekend, "if Republican leaders cannot send the President an ACA bill by April or May, they will face two politically unpalatable options. First, they could continue to press for a solution, delaying consideration of tax reform for an indefinite period. This delay would occur because both proposals are expected to be considered under the “budget reconciliation” process. However, since only one tax bill and one spending bill can be considered under that process in each budget cycle—and ACA repeal legislation is expected to have tax and spending provisions—Republican leaders plan to consider the ACA bill in the FY2017 budget cycle, and to begin the FY2018 budget cycle, including instructions to pass tax reform, once the ACA bill has passed."

The other option Goldman put forward would be to postpone ACA legislation and move to tax reform, essentially reneging on a campaign commitment.

That however is not going to happen. Instead, in some very bad news for Wall Street, earlier today Senate Majority Leader Mitch McConnell confirmed the worst case outcome, when he poured cold water on the Trump administration's goal of completing tax reform by the August recess.  "I think finishing on tax reform will take longer," McConnell said during a Playbook Live interview.

This automatically means that tax reform will be part of the 2018 Fiscal Year, and will not be implemented in the current budget year ag all.

Previously, Treasury Secretary Steven Mnuchin had raised Wall Street's hopes when he said in February that the administration wants to wrap up a long-held GOP goal of overhauling the tax code before lawmakers leave for a month-long break.  “So we are committed to pass tax reform,” he told CNBC. “We want to get this done by the August recess.”

Alas, according to the Senator, this will not happen, and may instead drag on well into the end of 2017 or even 2018. The Senate is tentatively scheduled to leave town by July 31st and return during the first week of September. 

Pressed about when he thought lawmakers would be able to complete tax reform, the Senate's top Republican demurred.  "It is complicated. All of those discussions are already under way," McConnell said. "How do you craft it?" As was already known - and eliminating Goldman's second option above - McConnell added that the Senate has to wrap up work on an ObamaCare repeal bill, also being passed through reconciliation, before it can bring tax reform to the floor.

In other words, tax reform - the main catalyst behind the market's relentless surge since the election - may not be coming this year at all. It also means that readers can now add 3-6 months for every "tax-related" catalyst date in the chart below.

Incindetally, Wall Street appears to be gradually coming to terms with this: below we show that investors have clearly downgraded their view of tax reform, judging by the relative performance of a basket of high-tax stocks, which should benefit disproportionately from tax reform. They no longer are.

 

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