We Still Think Tax Reform Is Likely to Happen

We don’t intend to make significant revisions to our tax reform assumptions following the House Committee on Ways and Means' release of the Tax Cuts and Jobs Act. This is the first document with actual details of how tax reform may work, but it will be adjusted as political constituents digest it and attendant political realities, such as the slim Republican majority in the Senate, are taken into account.

We continue to believe that tax reform during the Trump administration is more likely than not to occur and that the tax reform assumptions that we’ve incorporated into our valuations are a reasonable approximation of the potential outcome. In the realm of corporate tax reform, the bill touched on many of the areas that we previously opined upon, such as the corporate tax rate, depreciation, interest expense, treatment of foreign earnings, and tax credits. Therefore, we don’t plan to make any changes to our economic moat ratings or fair value estimates because of today’s release and will continue to monitor the situation.

The headline corporate tax rate proposed in the Tax Cuts and Jobs Act is 20%, lower than our current 25% assumption. However, many revenue-related parts of the tax reform bill have been scaled back from initial proposals.

For example, the latest bill allows the partial deduction of mortgage interest and property taxes. These alterations mean the current bill would likely raise federal debt levels more than many had initially projected. To attain the votes of spending hawks, the aggressiveness of the bill may have to be scaled back.

The overall corporate tax rate remains a key lever for negotiation, as effective tax rates truly determine the competitiveness of the U.S. relative to other countries. Industry groups will certainly push to keep their tax credits, and to the extent these credits lower effective tax rates, a modestly higher headline rate can keep the U.S. competitive with other countries.

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