Tax Reform Shaping Up Broadly as Expected

As we have long expected, Senate Republican leadership recently passed a “tax reform lite” plan that has the potential to bring about lasting changes to the U.S. corporate tax system. While we may modify certain tax-reform-related assumptions incorporated into our models, we don’t anticipate a material change in our fair value estimates or economic moat ratings due to various offsetting factors.

We believe that tax reform is more likely than not to occur and that the product of the House and Senate’s reconciliation efforts in committee will directionally align with our previous assumptions.

As a reminder, we had assumed the following in our models: 1) a 25% corporate tax rate beginning in 2018, 2) an election for firms to either fully expense their U.S. manufacturing capital expenditures when made or deduct net interest expense, 3) a deemed repatriation tax of 10% on overseas earnings held in cash, and 4) the elimination of certain special interest tax provisions.

Our assessment was shaped by our belief that various factions in the Republican party would ultimately compromise for the sake of a legislative win. Unlike healthcare, tax reform has been a closely held goal of the Republican Party and its constituents for decades.

However, the bill’s passage in the Senate does not fully guarantee that it will become law. Congressional leaders will have to reconcile both the House and Senate versions of the tax bill when it goes to a joint conference committee next week. Additionally, the Senate bill was passed with a slim 51-49 vote and there are still confounding factors that bear monitoring, such as the Senate special election in Alabama and Robert Mueller’s investigation.

That said, we think the bill’s passage in the Senate significantly raises the likelihood that its core reforms will eventually find their way onto President Trump’s desk. The bottom line is that tax reform is in the final innings of the legislative process.

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