Fra BNP Paribas:
More progress, new questions
Senate Republicans are maintaining momentum on their tax bill, with indications that reluctant senators are getting closer to being “yes” votes.
However, a trigger mechanism designed as a compromise to fiscally conservative senators introduces some new uncertainty to the effort.
While the progress on votes is positive, we see substantial risks remaining in the trigger
mechanism, the 12 December Alabama special election, and a possible government shutdown.
The US Tax Tracker will follow the progress of the current push for tax reform with new issues released as we get significant developments. Click here for our previous issue.
Latest developments
The Senate Budget Committee cleared the tax bill by a 12-11 party-line vote, moving the effort closer to a full Senate vote. On-the-fence Republican senators appear to be getting closer to “yes”, with Republican leadership seemingly prepared to increase deductions for small business, introduce future healthcare legislation to stabilize insurance markets, include state and local property tax deductions, and incorporate a trigger mechanism that would increase tax rates if future revenue falls short of targets.
Separately, Democratic leaders cancelled a planned White House meeting with President
Trump to negotiate on averting a government shutdown after the president posted a critical
tweet. The current continuing resolution to keep the government funded expires 8 December.
President Trump has in the past mused about shutting down the government.
What’s next?
A full Senate vote could happen as soon as Thursday. After that, representatives from both
the House and the Senate will work together to produce an identical bill that they believe both chambers can pass, although as an alternative it is also possible the House simply passes the Senate’s bill.
Our take
The introduction of the trigger mechanism introduces some uncertainty to the bill’s near-term passage. While details are slim at this point, the mechanism would raise tax rates in the event that government revenues do not meet expected targets. A number of senators have expressed concern over including such a provision; indeed, it could not only muddy the message of lowering tax rates, but could raise tax rates during a downturn as well.
In addition to the uncertainty posed by a trigger mechanism, we think the risk of a government shutdown has increased, and the 12 December Alabama special election continues to hold the potential to reduce Republicans’ Senate majority to 51-49. As a result, while the market has interpreted the Senate’s progress positively, we think the odds of passage have likely come down a bit, on balance.
Our view remains that tax reform is legislated in the first half of next year.
