US: Clearing the Tax Reform Logjam

Published on February 8, 2017
SGH Insight
In the last 24 hours or so, House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell have been reassessing their legislative options to keep corporate tax reform on track after it had become apparent it was in serious danger of delays or even derailment due to the need to move first on Obamacare.

*** We understand this afternoon that one of the "procedural options" being given serious consideration though not yet adopted by the Republican leadership on Capitol Hill would be to break the Obamacare legislation into "phases of replacement" over an extended period rather than as one near-term heavy political lift. ***

*** The aim is to give a priority to the House Ways and Means Committee to move on a "first phase" on the tax portion of the Obamacare legislation as soon as mid to late March. That, in turn, would free its chairman, Kevin Brady, to get back on track with a mark-up of the corporate tax reform bill in April. ***

Market Validation
(Bloomberg 2/9/17)
USTs Fall to Lows After Trump Promises Action on Taxes 10:16
Treasuries fall sharply to session lows led by 5Y after Trump says something will be announced on taxes in the next 2-3 weeks.
• 10Y futures contract moved 7 ticks to lows at 125-02; 65k traded over 5 minutes before 10am ET • Move coincides with advance for U.S. stocks and 50-pip surge in USD/JPY 50 to highest level since Jan. 3 Heavy Selling in Eurodollars as June Hike Odds Rise
Trading volume in Jun17 eurodollars jumped after Trump said something will be announced on taxes in the next 2-3 weeks; odds of Fed rate hike in June climbed to ~74% from 69% Wednesday.

In the last 24 hours or so, House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell have been reassessing their legislative options to keep corporate tax reform on track after it had become apparent it was in serious danger of delays or even derailment due to the need to move first on Obamacare.

*** We understand this afternoon that one of the “procedural options” being given serious consideration though not yet adopted by the Republican leadership on Capitol Hill would be to break the Obamacare legislation into “phases of replacement” over an extended period rather than as one near-term heavy political lift. ***

*** The aim is to give a priority to the House Ways and Means Committee to move on a “first phase” on the tax portion of the Obamacare legislation as soon as mid to late March. That, in turn, would free its chairman, Kevin Brady, to get back on track with a mark-up of the corporate tax reform bill in April. ***

*** Crucially, we understand the Ways and Means mark-up of the corporate tax reform bill will include the controversial border transaction tax, and that it is likely to include some “preemptive” modifications on transition periods to boost its prospects in the Senate. ***

Pressing Ahead with Legislative Agenda

In another key development on legislative strategy that may boost the prospects for the tax bill, we understand that Speaker Ryan and Senate Majority Leader McConnell have decided it is best that they proceed with their legislative agenda without waiting to see if President Trump is fully on board. That, as we have previously noted, is a potentially major drag on the timeline to proceed or not with the BAT (see SGH 2/2/17, “US: The BAT and the Trump Factor”).

But under the game plan being weighed, the two would push ahead on the proposed legislation rather than wait for a verdict from the President or for the apparent turf battles among White House staff to be resolved. If their legislation is going well, and looks to enjoy popular support, the President is likely to show his support.

Under the newly revised, accelerated timeline being considered, Ways and Means would pass the baton after it finishes its work on the tax elements of the Obamacare replacement (along with some touches on Medicare and Medicaid over which it also has jurisdiction) to the other House committee with jurisdiction, the Committee on Energy and Commerce.

The two Senate Committees with jurisdiction, Finance and the Health, Education, Labor and Pensions Committee would likewise undertake subsequent phases of the Obamacare replacement legislation.

Under this new timeline, the House would in theory pass the Obamacare bill in June, and the tax reform in July, with the Senate Finance Committee taking up Obamacare before the July recess, and corporate reform before the August recess.

A crucial link will be to boost the bill’s prospects in the Senate by including amendments in Brady’s eventual mark-up of the tax reform legislation that would help win support for the bill from key Republican Senators with a large oil and gas or retail interests in their states.

That is important because House Speaker Ryan will not force his Republican rank and file into a tough political vote on the BAT vote unless Senate Majority Leader McConnell is confident he can deliver 50 Republican votes when the bill gets over to the Senate.

 

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