Why The Odds Of Tax Reform By 2018 Just Got Slightly Higher

Amid intra-party chaos surrounding tax proposals, Height Securities analysts posted 85-percent odds of Congress passing a bill prior to 2018 elections — and offered a “sleeper pick” of the modified 2014 tax reform draft at 10 percent odds.

“We continue to get the sense in our conversations that something is better than nothing, even among Democrats who generally don’t want to give a win to an unpopular Republican president or give Senate Republicans something to hang their hat on for the midterms,” Height analysts Peter Cohn and Andrew Parmentier wrote in a Thursday note. “Democrats see tax reform as their ticket to infrastructure spending and reform of the international tax code to stop inversions.”

The firm expects the House Ways and Means Committee, which is “moving aggressively on tax reform,” to target late April or early May release dates for details of a Reps. Paul Ryan–Kevin Brady “Better Way” proposal. But the timeline is “ambitious” and poses risks.

The ‘Better Way’ Sentiment

House Republicans are working to get their proposal out ahead of White House and Senate plans to highlight the growth-inducing capacity of their blueprint and modifications to border adjustability.

As of this week, Senate members maintained skepticism about the consequences of a destination-based cash flow tax featured in the House GOP bill, according to Cohn and Parmentier. The Senators — and the White House — were evaluating other options, including a revised form of the 2014 tax reform draft by former House Ways and Means Chairman Dave Camp.

“The preference continues to be for deficit-neutral tax reform, at least over the long term (if not during the first decade), though we suspect non-offset tax cuts ultimately are the more likely scenario,” the analysts wrote.

The Camp Edge

In a Wednesday note, Height deduced a slight edge of the Camp plan over Ryan’s proposal, whose border adjustment tax remains a point of dispute.

“The Camp plan, while it did not have much going for it three years ago, today has the benefit of a more favorable revenue baseline since Congress enacted $600 billion in tax relief as part of the 2015 Protecting Americans from Tax Hikes (PATH) Act,” analysts said.

The bill could also gain momentum if the Joint Committee on Taxation adds a growth dividend from rate cuts.

“That means unpopular items such as an excise tax on large banks, repeal of ‘Last-In, First-Out’ (LIFO) accounting, and cutting the deduction for advertising expenses to 50 percent in the first year and amortizing the remainder over 10 years might not be necessary in a revised, updated Camp plan,” Cohn and Parmentier wrote.

They do not expect Congress to adopt the Camp plan as it was originally introduced but are taking note of increasing support for certain elements of the bill.

The Skinny Option

Still, there’s another way. Analysts placed 25-percent odds on a business-only tax proposal “that eschews dramatic reshaping of individual tax brackets and deductions, thereby avoiding almost limitless controversies.”

The “skinny plan” considers a corporate-rate cut to as low as 28 percent, the benefits of repatriation, attached infrastructure spending and a middle-class tax cut.

While not the preferred model of White House officials and Republican legislators, the proposal, resurrected from previous discussions between Ryan and Sen. Chuck Schumer, could appease Democrats.

“In our discussions Senate Democrats do not believe something big and controversial like the Better Way plan can be accomplished in the current political environment,” Height wrote. “Senate Democrats point out that generally corporate rate reduction below even 30 percent is extremely difficult to do without goring sacred cows (such as business interest deductibility, for instance).”

The Halfway Approach

Finally, Height pitched 20-percent odds on a “Better Halfway” plan, a modified version of the “Better Way.” This blueprint includes phase-in provisions and longer periods for certain sectors to move plants back to the U.S.

“We considered it telling when a pro-BAT [border adjustment tax] lobbyist acknowledged to us that the simple fact that the provision is now generally referred to as the BAT (signifying a new and separate tax, like a VAT [value-added tax]) means the opposition was able to mobilize early and quickly to frame the debate,” analysts said.

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