The Good, the Bad and the Ugly: Industry Reaction to Proposed Tax Bills
A WSJ Roundup
The tax overhaul making its way through Congress could help many stocks, providing another potential lift to an 8-year-old bull market.
A reduction in the corporate tax rate is expected to boost earnings growth, which many analysts consider to be the biggest driver of long-term stock gains. Goldman Sachs forecast that if Congress manages to cut the federal corporate tax rate to 25% from the current 35%, per-share earnings growth in the S&P 500 next year could rise to 15% -- more than double the bank's current estimate of 7% growth.
Shares of smaller, domestic-focused companies have already been gaining, and financial stocks are also predicted to rise. But technology, health-care and consumer-staples firms with a large share of profits coming from outside the U.S. may not benefit as much.
Banks stand to be big winners from the planned tax-code overhaul.
Big financial firms pay among the highest effective tax rates of any major industry, making a possible drop to a 20% corporate rate highly profitable. S&P Global Market Intelligence estimated the five largest diversified U.S. banks might have had a combined tax savings of $11.5 billion in 2016 if the new rate had been enacted.
Executives say the changes will also spur customers to invest and boost the broader economy. "People will have the optimism which is built around it fulfilled," said Bank of America Corp. Chief Executive Brian Moynihan. "If they're more optimistic, they'll borrow more."
There are potential drawbacks, however. Several big banks, including Bank of America and Citigroup Inc., will have to write-down the value of tax I.O.U.s generated by financial-crisis losses. The biggest banks may also lose the ability to deduct payments they make to the Federal Deposit Insurance Corp. for tax purposes.
For asset managers, the tax proposals offer something money managers of all stripes can rally around: The promise of higher stock prices.
A rising market would lift the value of the assets investment firms manage, and juice the performance of their funds. "That's what is creating a reasonable amount of excitement," said Loren Starr, finance chief at Invesco Ltd.
Some managers with a big presence overseas, such as Franklin Resources Inc., would further benefit from provisions making it easier for U.S. companies to bring home foreign profits.
But the industry could be indirectly hurt by provisions for individual investors. A proposed "first in, first out" rule would prevent investors from minimizing their taxes by choosing specific shares they sell from an investment position. Another limits how much individuals can put in their retirement-savings plan on a pretax basis. "If people are not allowed to invest in retirement as much, that would be negative for whole retirement space," said Mr. Starr.
Private-equity firms say tax changes being proposed by Republicans in both the House and Senate could dent their lucrative business model.
The industry's angst is primarily focused on a plan to limit businesses' ability to deduct interest payments from their taxes. Private-equity firms say the change could curb their ability to use debt to fund acquisitions, and hurt returns.
Another proposal would make it more difficult for private-equity managers to pay a reduced tax rate on a substantial portion of their income that's known as carried interest. Both versions of the bill extend the period over which firms must hold an asset before it is eligible for the lower long-term capital-gains rate to three years from one.
But one aspect of the proposed tax changes could greatly benefit companies owned by private-equity firms: the lower corporate tax rate.
Retailers and industry associations started lobbying politicians last year to remove a border-adjusted tax clause that would have imposed taxes on imported goods. Since most retailers sell large amounts of imported products, the clause would have eaten away at their profits -- costs retailers said would have to be passed on to consumers.
Since Republican lawmakers dropped the border-adjusted tax from draft legislation this summer, many retailers have pushed hard for a new tax bill, with a lower tax rate, to be passed. The National Retail Federation says retailers have one of the highest average corporate tax rates. "We like the lowest possible rate, but also want to see the rate effective January 2018 rather than phased in gradually," said David French, the group's senior vice president of government relations.
The NRF's spending on lobbyists soared this year to $10.5 million through October, compared with $7.1 million for all of last year, according to the Center for Responsive Politics. The other large retailer organization, Retail Industry Leaders Association, spent $2.3 million so far this year, about the same as last year.
A corporate tax cut would be welcome news for telecommunications carriers, which are some of the nation's biggest spenders on infrastructure and make most of their money through U.S. sales. It would save them billions annually. A provision that allows companies to immediately write down the full value of their capital investments through 2023 would also lead to big savings in the near term.
Companies that have a lot of debt may feel some pain from a cap on net interest deduction, but that would mostly be offset by a lower tax rate, analysts say.
AT&T has thrown its weight behind the legislation, saying it would increase its capital spending by $1 billion in 2018 if the legislation passes. "If you bring that down to 20%, we would expect businesses of all types and characteristics to come and invest," AT&T CFO John Stephens said at a recent investor conference. "That tax reform could generate significant opportunities for us."
Oil giants such as Exxon Mobil Corp. and Chevron Corp. stand to see significant gains from the GOP tax legislation, mostly from broad changes that would benefit other large companies.
Proposals such as reducing the overall corporate tax rate and lowering taxes on overseas profits will "help unleash economic growth and allow our industry to continue providing safe, reliable energy for Americans," Jack Gerard, president of the American Petroleum Institute, said earlier in November.
The Senate bill also includes a measure that would potentially open part of the Alaska National Wildlife Refuge to oil drilling, including the leasing of 800,000 acres for exploration.
The renewable energy industry is wary of proposals in the House tax bill that would reduce or sunset federal tax credits for wind and solar projects.
The Solar Energy Industries Association, a trade group, says it is pushing to protect the existing solar investment tax credit, which is scheduled to be gradually reduced to 22% in 2021 under current law. After that, the credit for residential projects is set to expire, but commercial and utility projects would receive a 10% credit. The House measure would do away with that 10% credit at the end of 2027.
The bill would retroactively change how businesses can qualify for wind energy tax credits. The American Wind Energy Association says altering the terms of a previous agreement to phase out credits by 2019 would be harmful.
"It would kill over half the wind projects in America, cause factory layoffs and break construction contracts already signed, and deprive farming communities of a cash crop they're counting on," said Jim Reilly, senior vice president of federal legislative affairs at AWEA.
The American Hospital Association opposes the Senate tax bill provision to repeal the Affordable Care Act's requirement that everyone get health insurance. A repeal of this mandate is expected to increase the number of uninsured, which will drive up unpaid hospital bills, said Tom Nickels, executive vice president of the AHA.
The AHA, which launched a digital advertising campaign in D.C. media to promote its views, also opposes the Senate proposal to do away with a tax exemption for so-called advanced refunding bonds, a money-saving option for tax-exempt borrowers under certain interest rate conditions. Nearly 80% of U.S. hospitals have access to tax-exempt bond markets because they are government-owned or private nonprofits.
The AHA, however, welcomed the Senate's move to omit a provision included in the House plan that would eliminate the tax-free benefits of private activity bonds.
Pharmaceutical and biotech companies are expected to support any eventual bill that lowers the corporate tax rate, which they argued has put them at a competitive disadvantage to overseas rivals.
Provisions in both the House and Senate bills imposing a relatively low, one-time tax on cash made overseas, meanwhile, could pave the way for U.S.-based multinationals to bring back billions of dollars they have kept outside the country to avoid the higher corporate tax rate. Moody's Investors Service estimates that drug and other health-care companies held $273 billion overseas last year. Analysts speculate the companies would use repatriated money to fund acquisitions, as well as pay for share buybacks and dividends.
One fly in the ointment: The plans imperil the orphan drug tax credit that provides an incentive for drug companies to conduct R&D in rare diseases. It currently allows companies to claim a 50% tax credit for the cost of such R&D, according to Goldman Sachs.
--Jonathan D. Rockoff and Peter Loftus
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November 30, 2017 16:58 ET (21:58 GMT)Copyright (c) 2017 Dow Jones & Company, Inc.