Market Review – Fundamental Perspective 5 December 2017

Late last week Senate Republicans passed their version of a $1.4 trillion tax package, while the House passed its version on November 16. While progress on getting a final tax package passed has been made, there is one final hurdle before enactment: the two bills must be reconciled and a single version passed through both the House and the Senate. In this report, we summarize the next steps in the legislative process and highlight the possible sticking points between the two bills. We conclude with a discussion of the bills' fiscal and economic impact.
We remain comfortable with our call for passage of a tax package in the first quarter of next year, with the cuts retroactive to January 2018. Our view is that the final package will rely on temporary cuts (either individual, corporate or both) and will likely end up looking more like the Senate's tax package rather than the House package.
The next step in the process is for the House and Senate to vote on conferees to a joint House and Senate conference committee. This committee will be charged with reconciling the differences between the two tax bills. We expect this process to take some time given several differences between the two bills. As the negotiations unfold, we see the final bill looking more like the Senate bill than the House bill given the very tight vote margin in the Senate. Complicating matters is a deadline to fund the government by December 8. It is expected that Congress will extend funding via a continuing resolution (CR) through December 22. This short-term CR would likely eat into the time needed to clear the final tax package through both chambers, since Congress will need to again come up with another funding bill before December 22. We maintain the view that the final package will likely be passed in Q1-2018.
Permanence of Individual Tax Cuts
One of the biggest possible sources of contention in reconciling differences will likely be the temporary nature of Senate tax cuts. In the House bill, a $300 family tax credit expires after 2022, but all other individual tax changes in the House bill are made permanent. In the Senate, however, all individual tax breaks including the larger standard deduction would expire after 2026. This expiration would also be true of the repeal of the state and local deduction (SALT). Essentially, the individual tax code would "snap back" to its current policies under the Senate bill. While this permanence issue may be a point of contention, there are few choices to work around Senate rules prohibiting a deficit impact beyond a 10-year window. Thus, the conference committee can accept the Senate's individual tax cut expiration, or it could allow some of the corporate tax cuts to expire.

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