With Americans now "stuck with Obamacare for the foreseeable future", attention shifts to Trump's next agenda item: tax reform.
This was confirmed by none other than the President himself who moments ago said that "Republicans will probably work on tax reform now." To be sure, following today's embarrassing fiasco, Trump will be eager to move on to a law which will be easier to pass, and according to market consensus, tax reform is precisely that. Alas, consensus may once again be wrong.
Ignoring the fact that work on tax reform in earnest won't start for 6-8 weeks as House Ways and Means member Merchant said moments ago, and may not even take place until fiscal 2018 (after August), the reality is that since Obamacare and tax reform are both parts of the Reconciliation process, as a result of not freeing up hundreds of billions from the deficit that the CBO estimated repealing Obamacare would do, it means that Trump's tax cuts have been hobbled - by as much as $500 billion - before even starting.
Furthermore, with the Freedom Caucus flexing its muscle and openly defying Trump, another major headache for Trump's tax reform is that the Bordere Adjustment Tax - an aspect of the reform that the Caucus has been vocally against - is likely off the table. And since BAT was expected to generate over $1 trillion in government revenues, it means that a matched amount in tax cuts is also now off the table.
In summary, between Obamacare repeal and BAT being scrapped, roughly $1.5 trillion in budget "buffers" are wiped out.
And yet, when news hit that Obamacare repeal has failed, stocks surged, arguably on traders' belief that this will accelerate tax reform. Alas, in addition to the above, Axios lists another four reasons why today's healthcare debacle spells trouble for tax reform.
- We now know that Congressional Republicans are willing to buck Trump and leadership on big-ticket legislative items.
- Republicans will need to keep working on healthcare reform, even though Trump says that he's done with it. They've campaigned for years on killing Obamacare, and can't head into the mid-terms without giving it another go. Particularly when they keep insisting that the current scheme is collapsing?
- CBO said that the Republican healthcare bill would shrink long-term budget deficits by hundreds of billions of dollars. Without it, filling the tax revenue hole becomes harder.
- Sean Spicer today said repeatedly that Trump had talked to "everyone" and listened to "all" ideas, which reflects zero consideration of Congressional Democrats. If such sentiment persists ? it just raises the degree of difficulty for tax reform, particularly if the White House doesn't change its position on keeping corporate tax reform tied to personal tax reform.
Finally, here is Goldman's persepctive. Despite the realities above, Jan Hatzius is his typically optimistic self about the potential for Trump's agenda.
Preliminary discussions on tax reform could begin soon but we do not expect legislative action on tax reform until June. This week’s events do not change our expectation that tax legislation will be enacted within the next year and actually suggest that enactment could come slightly sooner than we previously expected.
1. The American Health Care Act (AHCA) has no path forward for now. House Republicans appear unable to reach a consensus on any bill to repeal the Affordable Care Act (ACA, or “Obamacare”); we believe reaching a consensus among Senate Republicans would have been even more difficult in any case. This would appear to signal an end to the Republican effort to repeal the Affordable Care Act (ACA). That said, addressing health care in some way will be politically necessary, so we do expect health legislation to be considered again at some point later this year or next year.
2. Other issues must be addressed before Republican leaders can shift their full focus to tax legislation. The Senate is expected to consider the nomination of Judge Neil Gorsuch to the Supreme Court the week of April 3, which raises the risk of a Democratic filibuster, which Republicans might counter with a controversial rules change (the so-called “nuclear option” for Supreme Court nominations). Following a two-week recess, Congress will return the week of April 24 to consider extending spending authority, which expires April 28; inclusion of funding for the President’s proposed border wall would raise the risk of a government shutdown.
3. Congress will also need to address the FY18 budget resolution before it can act on tax reform. This is necessary to provide the “reconciliation instructions” that allow Republicans to pass tax legislation with only 51 votes in the Senate (and therefore no Democratic support). As we have noted before, reaching an agreement on the FY budget resolution will not be easy; in the past, conservatives have demanded a balanced budget within ten years but this would require endorsing spending cuts (in non-binding form) that some centrist Republicans might oppose.
4. Tax reform will probably not begin to move through the legislative process until June. In light of the other issues described above, we would not expect the House Ways and Means Committee to vote on a tax reform bill until late May (less likely) or June (more likely). The Committee is unlikely to release a detailed proposal until they are ready to vote, so details regarding the House proposal may not be known for at least another two months or so.
5. Enactment of tax legislation looks just as likely as it did before this week. The health bill faced much different challenges than tax legislation will face. While the health bill would have reduced benefits (tax credits and Medicaid eligibility) and the deficit, the tax bill is likely to provide new benefits (tax cuts) and will probably increase the deficit. Ultimately, we believe that there will be broad support among Republicans in Congress for legislation that reduces the corporate tax rate and cuts personal taxes modestly.
6. However, the defeat of the health bill indicates that complex and controversial tax reforms are likely to be difficult to pass and we note that the “Freedom Caucus” that opposed the health bill also opposes some of the most controversial aspects of the House Republican tax blueprint, like the border-adjusted tax (BAT). This suggests congressional Republicans might scale back their ambitions on tax reform, and pursue a simpler tax cut that includes selected reform elements (e.g. changes to the taxation of foreign profits of US multinationals and profit repatriation).
7. The timing on tax legislation might be pulled slightly forward. Compared to our prior expectation that a tax bill would not be enacted before Q4 2017 and could easily slip to early 2018, with the health issue no longer in play, our central expectation remains that it will be enacted in Q4 2017. However, the risk to that timing now appears more evenly balanced, since there no longer appears to be a risk that the health debate will drag out for several more months.
However, if today's events are any indication (and weighting item 6 above more heavily than Goldman), don't hold your breath for a law being concluded this calendar year.