Here Are The Negatives In The Republican Tax Plan, According To Wall Street

Judging by the market's euphoric reaction this morning, the Senate's passage of the tax bill on Saturday is nothing but good news for stocks (well, maybe not the Nasdaq). And indeed, banks - whose effective tax rate is around 30% - and other tax-sensitive companies are surging, with banks are outperforming and  sending the KBW bank index up as much as 2.8% to a fresh decade-high (BofA up as much as 3.9% to the highest since Oct. 2008; JPM up as much as 3.4% to record high; Citigroup up as much as 2.7% to highest since Dec. 2008). Even so, as Bloomberg reports, some analysts are sounding a few warnings. Their concerns include: a delay in potential benefits; the need to make fixes in a highly partisan environment; and curbing R&D credits.

Here are the negatives in the Republican tax plan, according to Wall Street:

WELLS FARGO (Christopher Harvey)

  • Sees difference between House, Senate timing of corporate tax cut (2018 vs 2019) as significant, with Senate’s 2019 likely to prevail; that means tax overhaul’s potential direct impact to 2018 corporate earnings is likely to be zero
  • Feels "great rotation" (out of tech, and into tax-sensitive issues such as banks, small-caps, value-oriented stocks) will need to pause
  • Senate’s depreciation policy may counterbalance timing of the corporate tax cut to a degree; notes Senate allows for full expensing of capital investments starting in 2018; in a higher tax environment (no change until 2019), that may pull some spending forward, aiding 2018 growth; also sees strong 1H M&A

COMPASS POINT (Isaac Boltansky)

  • A "concerning theme" is emerging: the likely need for fixes next year, while "it isn’t exactly clear how those changes will be made"
  • Structural defects in final bill are probable, given it’s being drafted at "warp speed," and most pieces of sweeping legislation require technical corrections; recently, however, lawmakers have been unable to reopen primarily partisan bills (like Dodd Frank, ACA)
  • Sees conference committee process as potentially volatile, but expects quick movement, with Trump signing a bill this year

BLOOMBERG INTELLIGENCE (Andrew Silverman)

  • Downsides include AMT inclusion, which haircuts or prevents some businesses from being able to take deductions and depreciation (including the R&D credit, which GOP had said they wanted to preserve)
  • Also notes slashing state and local tax (SALT) deduction; higher-than-est. repatriation rates (bad for tech, pharma cos.); haircut on taking net operating losses
  • Senate bill changes how non-profits and pensions are taxed, likely increases taxes substantially on "unrelated business taxable income"

HORIZON INVESTMENTS (Greg Valliere)

  • House/Senate conferees, who will start work on Monday, have "enormous number" of issues to resolve, including whether individual provisions are permanent, whether mortgage deduction will get haircut, when corporate rate cuts begin (2018 or 2019?)
  • Veteran tax lobbyists were "incredulous" this weekend over Senate-passed tax bill, which was "hastily patched together with enormous unintended consequences," including retaining corporate AMT, which effectively would kill the R&D tax credit
  • Adds bill is still being written and corrected; numbers don’t add up; Republican leaders, led by Paul Ryan, "have made no secret about their next goal," which is major overhaul of the welfare state, including curb growth of Social Security, Medicare, Medicaid as deficits rise; "Democrats, eyeing the next two elections, are salivating"

MOODY’S (Nick Samuels)

  • Senate’s overhaul is negative for state and local government finances (most sharply in high-tax states like Calif., N.Y., N.J.)
  • Change to SALT deduction would reduce disposable income for many taxpayers, likely outweighing positive effect of lower federal rates on consumption
  • SALT change would also hurt financial flexibility by increasing political resistance to tax increases at state, local level

MOODY’S (Christina Padgett)

  • Diminished interest deductibility, which is more punitive to highly-leveraged companies, is likely to have negative implications for low-rated speculative grade cos., may outweigh benefits of lower corporate tax rate
  • Spec-grade companies pay relatively little in taxes in part due to tax shield from interest deduction
  • Leveraged buyouts and industry sectors with highest leverage, weakest coverage of interest expense are among most vulnerable

HEIGHT SECURITIES (Ed Groshans)

  • Senate-passed bill amends tax law covering interest deductions on home equity indebtedness
  • This "seemingly innocuous" amendment would prevent homeowners from deducting interest on mortgages that are refinanced
  • Would likely reduce refinancings for borrowers who’d prefer to maintain mortgage interest deduction for tax purposes

MELIUS (Carter Copeland)

  • While tax overhaul may bring some extra profits to defense co. bottom lines and cash flow to shareholders, it may also make the future budget situation much tighter for the Department of Defense by removing "wiggle room in the annual fight for funding"

Source: Bloomberg

Comments

Ramesees Ben A Drill Mon, 12/04/2017 - 12:18 Permalink

Slight tax benefit for middle class and lower middle class. Upper middle class takes a small hit, especially in high tax states.  So basically neutral for individuals. Corporate taxes come way down.  Chamber of Commerce still owns the Republican Party.  Republicans better pray that this bill is as good for the economy as they hope it is, because it really doesn't do much for individual filers.

In reply to by Ben A Drill

Arnold Ramesees Mon, 12/04/2017 - 12:48 Permalink

Work down debt, so we can buy back more of the company store.

Less equities available, higher prices, and likely lenders to cover shorts, via their financial divisions that many large corps have.

I know it has been slowing down lately, but some chicken feed must be left to the flock for trading and holding purposes.

In reply to by Ramesees

Drater Ben A Drill Mon, 12/04/2017 - 14:44 Permalink

You would think with all that tax revenue CA would be a utopia with top-notch infrastructure, low crime, and an excellent education system. Instead it's a borderline 3rd world shithole with crumbling roads/bridges/dams, highest poverty rate in U.S., schools ranked at the bottom, and streets being sprayed with bleach in attempt to contain the Hepatitis outbreak. I escaped to Nevada a few years ago, it's not paradise but at least I'm not paying taxes like I lived in paradise. 

In reply to by Ben A Drill

techpriest Ramesees Mon, 12/04/2017 - 12:59 Permalink

Looking at the new brackets, it looks like the biggest winners are married households earning $90k or ~$250k, as the two biggest breaks occur in those neighborhoods. At the individual level, there is no change above that.

If you own a large house, it won't give the same tax break, and if you are earning significantly more than $250k you will not see any tax cut, and you also lose your home mortgage benefit.

The real action is in the corporate tax cut. If the gamble pays off, all of the money comes back from overseas, and presumably enough of it will reach enough people to make the gamble pay off economically (and politically). If it doesn't, then "muh corporations" will be blamed, and Elizabeth Warren will be in office :-X

In reply to by Ramesees

Ramesees techpriest Mon, 12/04/2017 - 13:07 Permalink

Yep, this is exactly right. It's a gamble that "it's the economy stupid" still works in an age when the Democrats play nothing but Identity Politics and people are expected to vote along racial and ethnic lines. Talk about fighting the last war. If the economy doesn't get good enough to offset the racial and ethnic divisions the Democrats have divided us along, it'll be Democrat sweep in 2018 and 2020.  

In reply to by techpriest

3-fingered_chemist Newbie lurker Mon, 12/04/2017 - 12:15 Permalink

If you take the standard deduction as most filers do, you're likely to see a small decrease in your federal tax liability. People with kids think that they will pay more in taxes since personal exemptions are being eliminated. The GOP has done a piss poor job of advertising the enhanced child tax credit (somewhere between $1600-$2000 a kid). Details are so bad on it that I don't know if it phases out at a certain income level though. 

In reply to by Newbie lurker

3-fingered_chemist 3-fingered_chemist Mon, 12/04/2017 - 13:25 Permalink

Ok, I just saw that the child credit would phase out at 230k. If you are the median 60k household with two kids. Your standard deduction would be 24k and you would get anywhere between 3200-4000 in tax credits for the kiddies. That means your federal taxable income is 36k assuming you don't fund a 401k with pre-tax dollars. 36k makes your highest tax bracket 12 % for a married couple in either the Senate or House plan. Let's ignore that you would pay 10 % up to 19500 in the Senate and you would actually pay 0 % on the first 12k in the House. Let's just go 12 % on everything to keep the math simple but also to highlight a potential worse case scenario. Your federal tax liability would be $4360, but if you got a $4000 tax credit for the kids, your federal income tax liability would only be $360 for 60k in income. If you fund a 401k to any degree, you are now one of the 47 % and have a negative tax liability. In the House your taxable income is really only 24k since the first 12k is tax free. Run the math there and your tax liability drops about $1500. Now you are a white bread middle class income parasite. :) 

In reply to by 3-fingered_chemist

GunnerySgtHartman Mon, 12/04/2017 - 12:00 Permalink

Elimination of SALT is a positive, not a negative.  New York and Kalifornia like to brag about the size of their economies, so why the hell should the rest of the country subsidize their stupid-high tax rates?  'Financial flexibility' my ass ... more like 'financial theft' from taxpayers.

deja GunnerySgtHartman Mon, 12/04/2017 - 12:22 Permalink

Why the hell should New York and California subsidize other states by sending a lot more money to the federal government than they get back?  Change that, and I'll be okay with the elimination of SALT.  Fourteen states pay more than they get back, hence subsidizing the other 36 + DC, whicg get back more than they pay in.These states getting welfare are:  South Carolina, North Dakota, Florida, Louisianna, Alabama, Hawaii, Mississippi, New Mexico, Kentucky, West Virginia, Indiana, Maine, Virginia, Wisconsin, Tennessee, Arizona, Maryland, Rhode Island, Montana, Texas, Alaska, Vermont, Idaho, North Carolina, Pennsylvania, Oregon, Connecticut, South Dakota, Nevada, District of Columbia, Iowa, Arkansas, Michigan, New Hampshire, Washington, Missouri, Georgia.   

In reply to by GunnerySgtHartman

GunnerySgtHartman deja Mon, 12/04/2017 - 12:31 Permalink

So in your view, SALT is about getting back an amount equal to what is paid in?  If that's the case, then each state should pay in the same amount of money.States like New York and Kalifornia should CELEBRATE the elimination of SALT.  Why?  Because government policy in those states is predicated on "taking from the rich and giving to the poor."  Those states should be HAPPY to be giving more than they get back - after all, that's what they do to their own residents.  The elimination of SALT proves those states to be HYPOCRITES.

In reply to by deja

canisdirus deja Mon, 12/04/2017 - 12:57 Permalink

A number of these are blue states...And I don't think there's anything wrong with CA getting that pulled. It screws over people there and I took advantage of it when I lived there (due to nosebleed-high taxes), but if you are willing to live there, you have to pay the taxes that you probably voted for. I didn't vote for the taxes, but a lot of the people there did. I ultimately voted with my feet.The fact is that if you're not landed gentry (Prop 13) in CA, you're already paying a ridiculous amount of what you earn for the honor of being there. This might make some of them think twice about what local taxes they vote for. If they're really suffering, they can do what millions of others just like them have done over the last 20-25 years: Move to NV, AZ, TX, or NM. Lesser numbers went elsewhere (OR, CO, MT, WA, and UT come to mind, plus the rest of the country). Hell, my entire family was born and raised there (including me) for the last 5 generations (two earlier ones moved there) and most of us have left for greener pastures if we didn't have tax-protected property.It doesn't make any sense that the federal government subsidizes state and local taxes. The claim that they send more than they receive is also dubious when you consider that they send a lot less than they would if it wasn't for this exemption.

In reply to by deja

A Likely Story GunnerySgtHartman Mon, 12/04/2017 - 14:22 Permalink

If elimination of SALT is good, then so are other deductions.  Why should mortage interest be deductible?  Subsidizes debt, not savings.  And let's eliminate corporate deduction for interest.  And why leave carried interest and TPI's for corporate enties?  In just a few years the slow exposure of the BS that's embedded in this legislation will reveal itself.

In reply to by GunnerySgtHartman

MrBoompi Mon, 12/04/2017 - 12:02 Permalink

When Goldman knows what's in the bill before Congress knows, and you know Congress isn't even given time to read the bill before voting on it, it will be a fucking piece of shit that does nobody but the people who wrote the bill any good at all.  The democratic party is corrupt and works for the wealthy establishment.  They no longer support everyday Americans.  So what do we do?  We vote in Republicans, who have always catered to the rich.  And then we expect improvements in the federal income tax system?  How fucking stupid are we?  

LawsofPhysics Mon, 12/04/2017 - 12:03 Permalink

Why is any person/corporation paying any taxes at all with the bankers and financiers around the world giving themselves access to all the money they want with little to NO interest (in the E.U. some are PAYING themselves to take money via NIRP) no real work and no real collateral requirement?!?!?!?!?"Taxes"? LMFAO!!!Taxes are a fucking distraction you stupid fucks!!! Only peasants pay taxes!!!!  

AGuy 0valueleft Mon, 12/04/2017 - 12:54 Permalink

"One mandate: Stock buy Backs. The rest is noise."

Except this Bill would abruptly end Stock BuyBacks since Interest payments on loans (to pay for stock buybacks) would end.

In the end, this Bill does ZIP for companies. Consider that Most business borrow at about 4% and deduct the interest. Which is a better deal. Borrow and pay 4% or Save at 20% + State + Local Corp Tax rates? Borrowing is much much cheaper!

Plus Companies also have to deal with the SALT deduction elimnation. This for most companies there will be no net tax cut, but a very real Tax Hike!

In reply to by 0valueleft

DaGov Mon, 12/04/2017 - 12:04 Permalink

I love how every limosine liberal in NY/CT/CA/NJ is crying about how the SALT repeal is bad for America.  Fuck every one of them. 

My Days Are Ge… DaGov Mon, 12/04/2017 - 13:43 Permalink

We pay north of $20,000/year in real estate taxes on our house and north of $10,000 in NJ personal income taxes.  So we have to tax $20,000 more on our federal return.  The increase in the personal exemption helps a little now.  But the exemption is not indexed for inflation, which the Fed says is running 2.5% per year for the past 30 years.  In 10 years, the exemption will be worth 25% less.  But, our real estate taxes go up 2% per year.  Everyone is squeezed in the same vise.The SALT repeal is ruinous for everyone.  Wait until you try to sell your house with a $30,000 or $40,000 annual real estate tax bill - the bid for your home will decrease.  Property values will suffer.

In reply to by DaGov