A WSJ Roundup
U.S. STOCKS
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.
--Akane Otani
BANKS
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.
--Telis Demos
ASSET MANAGERS
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.
--Justin Baer
PRIVATE-EQUITY FIRMS
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.
--Miriam Gottfried
RETAILERS
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.
--Sarah Nassauer
TELECOMS
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."
--Ryan Knutson
ENERGY
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.
--Bradley Olson
RENEWABLES
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.
--Erin Ailworth
HOSPITALS
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.
--Melanie Evans
PHARMACEUTICALS
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
AUTOS
Auto makers plowing billions of dollars into developing electric
cars are nervous about losing an income-tax credit of up to $7,500
for consumers buying the advanced vehicles after the House tax bill
eliminated it. (The Senate bill preserves the credit.)
Car companies view the tax credit as key to luring consumers to
electric or plug-in hybrid vehicles that are thousands of dollars
more expensive than gasoline-powered counterparts.
They and their Washington lobbyists have been vocal that
eliminating the tax credit could curb electric-car sales and make
it difficult for them to meet looming environmental regulations,
which call for significant curbs on emissions and increases in fuel
economy.
--Mike Spector
MANUFACTURERS
Manufacturers have long complained about the difficulty of
finding skilled workers with degrees in science, technology,
engineering and math. Kip Eideberg, vice president for public
affairs and advocacy at the Association of Equipment Manufacturers,
said the proposed elimination of tax credits for graduate students
could have a "chilling effect on the future manufacturing
workforce."
"Making it harder or less affordable for people to pursue those
degrees is not a good thing at all," he said.
In addition, small- and medium-size manufacturers may not get as
much tax relief as larger corporations, according to the National
Association of Manufacturers. "Permanent, real and strong relief
for small businesses is going to be an imperative in the final
bill," said Jay Timmons, the association's chief executive.
Caterpillar Inc. is among U.S. multinationals hoping for lower
taxes on foreign profits and repatriated cash. Amy Campbell,
director of investor relations, has suggested such changes would
free up funding for the company's U.S. operations "About 90% of our
cash right now is overseas," she said at a Nov. 15 conference.
--Andrew Tangel
AIRPORTS AND AIRLINES
A provision in the House bill would end the practice of local
governments selling tax-exempt "private activity bonds" that
airports use to finance new or rebuilt terminals, parking garages
and other infrastructure.
Airports estimate they have $100 billion in infrastructure needs
in the next five years. Without the tax break, they say they would
have to sell costlier taxable bonds. Two trade groups are lobbying
to retain the bonds, which also are used to fund ports, hospitals
and universities.
Airlines are equally unhappy about the potential repeal of those
bonds, as well as provisions in the tax bills that would limit
corporate interest deductions. But the promised corporate tax rate
cut would more than make up the effect of smaller changes airlines
dislike, according to their leading trade group.
--Susan Carey
DEFENSE
If the tax cut doesn't generate increased revenue through higher
economic growth, as Republicans envision, a rising federal budget
deficit could lead to military spending cuts in the early 2020s
that would hurt defense contractors.
While the Pentagon investment budget is now growing at 3%-4% a
year, the administration hasn't flagged medium-term growth trends.
"As it did in the 1980s, that could signal a peak in DoD spending
prospects, even in a world that is dangerous," said Byron Callan,
at Capital Alpha Partners LLC.
Defense executives say they may prepay some pension obligations
to secure tax benefits of writing off that cost at the current 35%
rate.
--Doug Cameron
RESTAURANTS
Most restaurant companies have been battling increased labor
costs and flat or falling customer traffic, making a lower tax rate
more welcome than ever.
"We believe that a simplified tax code for businesses and
individuals will lead to more economic growth for the country,"
said Dunkin Brands Group Inc. Chief Executive Nigel Travis.
Stephens Inc., a financial-services firm, said companies that
own most of their restaurants rather than franchise them would
especially benefit from the proposed legislation because they could
write off the cost of building new outlets.
--Julie Jargon
GROCERS
Independent supermarket owners are pushing for Congress to adopt
the same lower corporate tax rate for pass-through businesses that
will be given to big corporations under current proposal.
The National Grocers Association, the trade association
representing independent supermarkets, wrote to Senators on Tuesday
urging them to "create a more level playing field for Main Street
supermarkets." As it stands, the tax bill could accelerate
consolidation already under way in the grocery industry, they
said.
--Heather Haddon
AGRICULTURE
Many farm groups are pleased the proposed legislation includes
tax deductions for large capital purchases and other provisions
that help farmers reduce large swings in their tax burdens
resulting from variations in markets and weather.
But the National Farmers Union, which advocates for small
farmers, is worried about plans in the Senate version of the bill
to repeal the Affordable Care Act's health-insurance mandate. Roger
Johnson, the group's president, said farming is among the most
dangerous occupations in the country and that many farmers rely
heavily on access to medical care and would be hurt by higher
premium costs expected to result from the bill.
Agricultural cooperatives want to protect deductions related to
co-op costs, which farmers use to reduce their own tax obligations.
Discarding that deduction -- which both the versions of the
legislation would do -- would hurt farmers amid a multiyear slump
in crop prices, said Chuck Conner, chief executive of the National
Council of Farmer Cooperatives. "The timing of this couldn't be
worse," he said.
--Jesse Newman and Jacob Bunge
CRUISE OPERATORS
Major cruise operators are looking at the possibility of paying
more to the U.S. Treasury if the Senate version of new tax
legislation becomes law.
Under current rules, Carnival Corp., Royal Caribbean Cruises
Ltd. and Norwegian Cruise Line Holdings Ltd., have minimal U.S.
taxable income on most of their operations. The companies are all
based in Miami but incorporated in other counties. But the Senate
proposal would create a new category of taxable income for foreign
corporations with cruises originating from the U.S.
"The industry pays hundreds of millions of dollars in fees and
taxes to U.S. ports and jurisdictions in which they operate -- even
though a very small percentage of cruise line operations occur in
U.S. waters," said Carnival spokesman Roger Frizzell.
Even if the Senate measure is adopted, cruise operators would
only be subject to corporate tax for an average 12% of their total
cruise days, which translates to an effective tax rate of 2%, or a
combined $70 million a year, according to estimates by UBS.
--Costas Paris
JAPAN
Concerns that a lower U.S. corporate tax may undermine the
competitiveness of Japanese companies and cause them to relocate to
the U.S. have spurred some to suggest that Japan might follow
America's lead.
"Japan should also do tax reform to be on an equal footing,"
Mitsui Fudosan Co. chairman Hiromichi Iwasa said in early November.
His company, one of Japan's biggest real-estate firms, has been
actively investing in the U.S. real-estate market. A spokesman said
the company wasn't reconsidering its stance.
Toyota Motor Corp. expects a positive impact from a lower
corporate tax rate but is also girding for a possible negative
impact from any tax that may be levied on transactions between
Toyota's headquarters in Japan and its American affiliate, a
spokeswoman said.
"As a global company, we expect open trade and fair systems,"
she said. "We will carefully watch the process and try to deepen
our understanding."
--Megumi Fujikawa
(END) Dow Jones Newswires
November 30, 2017 16:58 ET (21:58 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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