The likelihood of the Republican tax bill undergoing change is high since the House tax bill aims to not only cut taxes, which by itself is hard, but is also taking on provisions that are specific to certain industries, which piles on additional load and makes it even harder.
The Trump Administration tax overhaul bill that was unveiled on Thursday appears to favor big businesses, including MNCs, and is likely to result in the availability of more cash investments, dividends and improved balance sheets.
While the new measures has proposed slashing the corporate tax rate, a long sought demand by U.S. companies, it is also likely to negatively impact the ability of highly leveraged companies to deduct debt interest as well as strip tax breaks from sectors such as energy and pharmaceuticals.
“This bill would give most companies a lot to cheer about, but we’re getting a muted reaction in the market because there will be a lot of pushback” from companies that could lose some of their tax breaks, said Pete Santoro, a portfolio manager of the $3.8 billion Columbia Dividend Opportunity fund.
The 429-page proposed tax bill, marks the largest overhaul of the U.S. tax system since the 1980s. Its proposals include slashing the U.S. corporate tax rate to 20% from 35%, bar certain popular tax breaks including half the interest deduction on new mortgages and deductions for state and local taxes as well as reduce tax rates on individuals.
The proposal also creates a new 10% tax on the foreign subsidiaries of U.S. companies and intends to impose a 20% tax on payments that foreign businesses operating in the U.S. make from their American operations.
Donald Trump has informed House Republicans that he hoped to sign the bill into law by November 23.
The mood in the market could be judged from its overall reaction to the proposed tax overhaul with the Dow Jones Industrial Average rising by just 0.3% while the broader S&P 500 index’s reaction to the bill was flat.
To better gauge the market’s reaction, analysts and investors are looking at companies who are likely to be effected the most from the proposals in the bill, chief among them being General Electric Co, which has more than $10 billion in foreign assets such as property and equipment that would be subject to a one-time tax of 5 percent, totaling $2.1 billion, according to Morgan Stanley.
On Thursday, GE’s shares slipped by 1% continuing to trod on its downward path, spurring fears in analysts that the company may cut its dividend.
GE did not immediately respond to requests for comment.
As per Brian Jacobsen, Wells Fargo Funds Management’s chief portfolio strategist, pharma companies and renewable energy companies that receive tax credits for clinical testing expenses for certain drugs are set to face heightened costs if the bill becomes law. The removal of those tax breaks will make it less likely the bill will pass, said Jacobsen.
He went on to add, “What makes this tax reform rather than just tax cuts is that they’re taking on a lot of provisions that target specific industries. That’s why, while taxes are hard, tax reform is harder” .
According to Rob Martin, an economist at UBS, companies which are potentially going to benefit from the proposals, include technology companies such as Microsoft Corp, Apple Inc, and Cisco Systems, which hold more than 10% of their market values in cash abroad.
He went on to add, a 12% tax bill, as opposed to the present 35%, on repatriated profits is “higher than some companies hoped for but low enough that I think they’ll be happy”.
Analysts and investors expect the specifics of the bill to undergo change with corporate lobbyists wanting to tweak the bill further.
“In its current form there is a zero percent chance that this passes,” said Linda Bakhshian, a co-portfolio manager of the $1.2 billion Federated Equity Income fund.