Thursday, November 9, 2017

Markets fall on talks of delay for corporate taxes

Dow fell 101 (but 150 off the lows), decliners over advancers almost 2-1 & NAZ declined 39.  The MLP index lost a fraction to the 268s & the REIT index was off pennies in the 362s (a lofty level for the index).  Junk bond funds dropped & Treasuries were slightly lower.  Oil finished above 57 & gold went up 3 to 1287 (relatively high in 2017).

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An amendment from the chairman of the House tax writing committee modified several provisions of the GOP tax overhaul bill to boost the rate applied to companies' offshore cash, tweak rules for pass-through businesses & restore the adoption credit, ahead of a full House vote that's expected next week.  The last-minute rewrite shows just what a difficult balance House Ways & Means Chairman Kevin Brady & House Speaker Paul Ryan have to strike to incorporate demands from lawmakers & lobbyists, without blowing past the deficit limit of $1.5T.  The new version restores the adoption credit.  Originally, the House bill eliminated the credit, which is currently worth as much as $13,750 per eligible child.  The amendment offers several provisions that it says will make it easier for smaller businesses to succeed & grow.  The changes include providing a new tax rate of 9% for businesses earning less than $75K in income.  The benefit is phased out as taxable income exceeds $150K & fully phased out at $225K.  The National Federation of Independent Business supports the amendment & will back the bill.  The bill would still limit access to the new 25% tax rate.  For business owners, just 30% of their income would qualify for that rate; the remaining 70% would be treated as wages.  Or they could use a formula based on their level of capital investment to determine how much income would get the new rate.  The amendment says companies that use loans to finance their high-cost inventory, such as car dealers, will be given the ability to completely write off their interest payments.  In exchange, those businesses won't be able to immediately write off their capital investments.  The original House bill hadn't specified that carve out when it called for limiting interest deductions to 30% of a company's adjusted earnings.  The amendment scratches the provision that would have accelerated taxation of money put away into non-qualified deferred compensation plans.  The earlier version would have taxed deferrals as soon as they weren't at risk of being forfeiture instead of when they eventually paid out.  That likely would have led hundreds of US companies to scrap such programs altogether, affecting scores of top execs who use them to beef up retirement savings.  The amendment would boost proposed rates on $T of  overseas income to 14% on income held as cash & 7% on non-cash holdings.  The bill that Brady released a week ago proposed rates of 12% & 5% for offshore cash piles.

Revised House GOP Tax Bill Calls for Higher Repatriation Rates

Treasury Sec Steve Mnuchin said that he hoped the GOP's proposal to eliminate state & local tax (SALT) deductions would send a message to high-tax states like NY & California.  “I do hope that this sends a message to the state governments that, perhaps, they should try to get their budgets in line,” Mnuchin said.  “And the question is: why do you need 13 or 14% state taxes?”  Despite bipartisan pushback from lawmakers in states like NY, NJ & California, Mnuchin stood strong on eliminating the deductions, saying the federal gov should not be in the business of “subsidizing state taxes.”  While he was speaking n NY, Mnuchin mentioned he had also addressed the issue in Cal & was headed to NJ next.In the tax proposal put forth by the House of Representatives last week, Reps allow state & local property tax deductions up to $10K, while eliminating most of the other SALT deductions.  Mnuchin said it was his “expectation” that this version of the provision would ultimately be passed.  Eliminating the popular deductions could increase federal revenue by $1.3T over the next decade, according to the Tax Policy Center.  However, as a result, about 24% of taxpayers nationwide would see an increase in taxes.  Those increases would be outsized for residents in high-tax states such as NY & California, where resident taxpayers would incur more than 30% of the tax increase from trashing the deduction.  Additionally, individuals with incomes in excess of $100K would have the largest tax increase in both $s & as a percentage of income, paying 90% of the increase associated with eliminating SALT.  However, Mnuchin was quick to point out that some of the individual losses from SALT would be, at least partly, offset by other parts of the bill.  For example, he said repealing the alternative minimum tax (AMT) would help New Yorkers, & potentially eliminating the estate tax would benefit wealthy individuals with incomes in excess of $1M.

Mnuchin fires warning shot to high-tax states: Get control of your budgets

Mnuchin left open the possibility of delaying the administration's planned 15 percentage point reduction in the corp tax rate during a speech today, sending markets into the red.  “The sooner we get this, the 20% rate, the better it is for the economy, but the House and Senate are having to look at how we pay for all of this,” he said.  “These are things that are still being discussed … A year [delay] is better than, obviously, a longer phase-in.”  The dramatic reduction in the corp tax rate is a centerpiece of the GOP's tax plan, but it also happens to be one of the most expensive parts.  Lawmakers have been weighing putting off the corp cut until 2019, in order to balance costs with the $1.5T allotted for tax reform under the fiscal year 2018 budget.  This week, the Congressional Budget Office (CBO) estimated that the House proposal would add $1.7T to the federal deficit over the next 10 years.  The Senate bill is expected to include a one-year delay in the corp tax cut which could save more than $100B.  The Dow suffered after the announcement.  However, even if businesses do have to wait a year to pay the lower tax rate, Mnuchin said the automatic expensing provision would take effect right away, providing firms with a “huge incentive to invest” domestically, even before the 20% tax rate is implemented.  the timing of the corporate tax cut will be less important over the long-term for companies.  Mnuchin was steadfast on was the 20% rate.  While acknowledging that Pres Trump originally wanted to lower the corp tax rate to 15%, he said ultimately the higher rate was decided on because it “was the right balance of what [the U.S.] could afford.”  “We’re sticking with the 20%, that’s critical,” he added.  The Treasury sec said he expects lawmakers can have a finished bill on the desk of the pres by Dec.

Mnuchin indicates corporate tax cut could be delayed, says 'still being discussed'

The stock market rally has been heavily been betting on a new tax bill that would bring lower taxes, especially for businesses.  Now there are proposals from the pres, House & Senate which will have to be combined & then get passed by Congress.  The administration is pushing on making the year-end deadline which is less & less likely, day after day.  Probably the biggest impediment for the stock market is a possible delay in corp taxes.  There are also mundane tasks for Congress like funding the budget for the rest of the fiscal year.  Over the short term, the clock keeps ticking while tax legislation remains just "all talk."  At least the bulls returned in the PM & lifted the Dow above its AM lows even though there is plenty confusion about the future of taxes.

Dow Jones Industrials


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