Tax reform becomes Wall Street obsession

Tax reform becomes Wall Street obsession
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Financial analysts and investors are on constant alert for any crumb of news from Washington about tax reform as they try to game out which companies will win big and how it will affect profits going forward.

But industry sources tell The Hill that the high hopes for a tax overhaul that fueled a stock rally after President Trump’s election are starting to fade, due in part to the slow pace of legislating and the administration’s decision to release a tax plan with few details.

“There was a huge disconnect between Washington and New York with regards to tax reform,” said a former Senate aide now on K Street. “Folks within the business community are starting to realize that the aggressive agenda that was put forth by this administration in the early days was a pipe dream.”

Behind Trump, who campaigned on reshaping the tax system to unlock economic growth, congressional Republicans are laboring toward the first major rewrite of the tax code since 1986.

Trump made tax reform one of his central campaign promises, and Wall Street analysts and investors expected Trump’s team to deliver quickly on the pledge. Stocks soared as a result.

Eight months later, Republicans are still working on the repeal of ObamaCare, which must come first. Meanwhile, the future of tax reform has been clouded by intraparty feuds over how the legislation should be crafted.

The situation has proved deflating for Wall Street, revealing a disconnect between its perceptions of tax reform and the political realities of accomplishing it.

“Washington is a challenging place to understand, and it takes a great deal of time for investors to understand the workings, the ebb and flow,” said the former Senate aide. “There is a good reason why comprehensive tax reform hasn’t been completed for 31 years. You have so many parties involved in and so many players in the game.”

Republicans agree on broad principles for the reform push, such as lowering corporate tax rates, broadening the tax base and scrapping certain loopholes. But like any major policy change, the difficulty is in the details.

“Everybody wants to do tax reform, but it’s a matter of agreeing on what that means,” said one financial services industry tax analyst. “There’s a lot that needs to be done beforehand.”

Speaker Paul RyanPaul Davis RyanDon't let them fool you — Republicans love regulation, too Senate harassment bill runs into opposition from House The Hill's Morning Report — Sponsored by PhRMA — The art of walking away from the deal MORE (R-Wis.) and House Ways and Means Committee Chairman Kevin BradyKevin Patrick BradyOvernight Finance: White House planning new tax cut proposal this summer | Schumer wants Congress to block reported ZTE deal | Tech scrambles to comply with new data rules White House plans to release new tax cut proposal this summer Senate health committee to hold hearing on Trump drug pricing plan MORE (R-Texas) favor a proposal to make exports tax-exempt and boost taxes on imports, called “border adjustment,” but the idea is facing stiff resistance in the Senate.

The fate of the border-adjustment tax is an obsession for financial analysts, as it would create a dramatic reshuffling that could cut into the profits of import-heavy industries like retail while boosting the prospects of American exporters.

Brady on Tuesday floated a five-year implementation period for the border tax, showing the idea is very much alive on Capitol Hill despite the pushback it has faced.

The White House has also focused on touting “the biggest tax cut in history,” while lawmakers emphasize fairness and helping United States businesses succeed internationally.

While the House has released a blueprint plan that’s shaped the debate so far, senators and the White House have been mum on specifics. Wall Street eagerly awaited a tax reform plan released by the administration in April, but the Trump blueprint left a slew of unanswered questions in its wake.  

The White House and Congress will also need to decide whether tax reform can contribute to the debt, whether the changes should be permanent and the legislative processes to pass it.

The analyst told The Hill that “disillusionment” is spreading in the vacuum of few specifics.

“There really doesn’t seem to be a whole lot of common ground,” the analyst said. “People are a little bit uneasy that we’re not seeing details right now.”

Lawmakers are expected to push ahead with tax reform for as long as possible. It’s long been a Republican priority, and the White House is hungry for major legislative wins.

Financial services lobbyists and investors are holding out hope that tax reform could still happen before the 2018 midterm elections.

“It’s not over,” said one lobbyist representing financial services companies. “It’s by no means a closed window, and we’re still going to be doing everything we can to get a pro-growth tax package.”

For now, tax reform advocates are clinging to positive messaging from the Trump administration and updates from the congressional committees crafting reform packages.

“I don’t think tax reform is ever dead,” said the lobbyist. “It’s always there because the system is broken and people are trying to improve it.”