NEW YORK — Wall Street and corporate America view President Donald Trump’s bold agenda for a sweeping tax overhaul as largely dead for the year.
Executives, lobbyists and Wall Street analysts increasingly believe the administration — distracted by repeated crises while facing a short and crowded legislative calendar — will be unable to deliver on Trump’s promise to slash corporate and individual tax rates this year and ignite significantly faster economic growth.
The main hope now in corporate America and on Wall Street is that the White House and Congress manage to bypass a scary fight over raising the nation’s debt limit this summer, keep the government open and avoid any major foreign policy crisis.
“It is just completely unrealistic to think they can get a big tax reform bill done this year,” said Greg Valliere, chief global strategist at Horizon Investments. “They haven’t even agreed whether they are doing tax cuts or tax reform. They haven’t decided if it needs to be paid for or not and I don’t think they appreciate just how big a fight the debt limit is going to be.”
The Wall Street outlook for overhauling the tax code this year took a hit when the House revived the effort to repeal Obamacare, sending the issue to the Senate where it will now consume precious legislative time and political capital.
And while Hill Republicans argue that Trump’s decision to fire the FBI director and other Russia-related scandals will have no impact on tax reform, the political firestorm has already slowed down movement on Capitol Hill and emboldened Democrats to try to block Republicans’ every move. And Wall Street analysts believe it will help push tax reform into 2018 and perhaps even beyond next year’s midterm elections.
“It’s very unlikely they can get tax reform done this year because the cleavages within the party on health care are very similar to those on taxes,” said Megan Greene, chief economist at Manulife. “And they say they want to do both corporate and individual rates and there’s no way they can do that by the end of the year. They will need a new budget to do tax reform through reconciliation and it’s not clear at all that they can pass that. And it’s going to be hard to get tax reform done next year because of the midterm elections so it may have to wait until 2019.”
In a recent note to clients, Goldman Sachs analyst Alec Phillips also suggested tax reform could get pushed into 2019. Further delays “could push consideration of tax legislation too close to the upcoming midterm election, reducing the likelihood that tax legislation is enacted in the next two years,” he wrote.
All the doom and gloom from Wall Street contradicts what Republicans are saying both publicly and privately.
They argue that while the Senate deals with health care, the House will push forward on tax reform beginning with a House Ways and Means Committee hearing on the issue on Thursday. While there are big arguments on details like a border tax and the need to be revenue neutral, there is large agreement on cutting rates.
“Yeah, it’s going to get done,” House Speaker Paul Ryan said of tax reform on Fox News last week. “We totally agree on this.”
Tony Sayegh, a spokesman for Treasury Secretary Steven Mnuchin, who along with National Economic Council Director Gary Cohn is taking the lead for the administration on tax reform, said corporate America has it wrong and tax changes will happen this year. “We are very aware of what is in process right now. We are working with our partners on the Hill to get this done. We feel like we can certainly accomplish that.”
Lobbyists and Wall Street executives disagree and point mainly to the calendar. Only around 40 working days are left for the House before the monthlong August recess.
When Congress returns in September, it will face a pile of pressing deadlines including the need to raise the debt limit and pass a new government funding bill. Both are likely to need at least eight Democratic votes in the Senate.
Democrats are likely to use every opportunity to slow Republicans down and demand that any must-pass bill include a special prosecutor to look into allegations of collusion between Russians and the Trump campaign in 2016.
Republicans will also need to pass a new budget in order to provide a vehicle to do tax reform through a reconciliation process that would not require Democratic votes to pass. Both administration officials and senior Republicans aides on the Hill say this will be the path for tax reform and they do not expect to do much work with Democrats on the issue.
One senior Republican Senate aide said that while the party seems far away from being able to pass a 2018 budget, the measure could get wrapped into the debt limit hike, opening that path to tax reform. But that would likely require Democratic cooperation.
For lobbyists closely following the tax reform prospects on Capitol Hill, all this means any sweeping rewrite that could have a significant economic impact is highly unlikely this year.
“I still see a slight possibility that some slimmed-down version of a tax cut could get done late this year, but it’s probably an early 2018 event,” said a financial services industry lobbyist who declined to be identified by name contradicting the White House timeline. “What’s being talked about in meetings I’m having is just some targeted rate reductions and that’s pretty much it. Maybe they could do that but even then it’s probably next year.”
So far, the grim prospects for getting tax reform done this year has had little impact on a stock market that has shown remarkable resilience to every piece of Trump related chaos coming out of Washington.
The reason for this, analysts say, is that with the economy near full-employment and growth expected to rebound the rest of the year, there is no obvious and immediate need for a big tax cut package.
And economists largely agree that any set of rate cuts that eventually make it off of Capitol Hill would probably have only a minor impact on growth that would not be felt until 2019 at the earliest. If tax reform looked permanently dead, it could force a reckoning on Wall Street. But until then, investors seem patient.
“If markets suddenly thought this was totally dead, that’s a very bad story,” said Valliere. “As long as the process moves forward, however slowly, I think markets can handle that.”
The bigger risk in the short-term is that talks toward passing a funding bill and raising the debt limit late this summer bog down or the White House winds up in a diplomatic crisis with North Korea or another nation.
“I think there is room for a market correction because all of the upside seen after the election is already priced in,” said Greene. “It’s just really hard to guess what the specific trigger will be.”