Traders have been driving themselves crazy trying to handicap the health-care vote tonight, but there's a bigger issue for the markets: Will getting a tax bill through be easier or harder than getting a health-care bill through?
Partly, the answer depends on what happens to the health-care bill. FBR's Chris Meekins was on CNBC on Thursday, reiterating points made in a note by his colleague Ed Mills: If health-care reform efforts blow up, tax reform will take longer, and the chances of comprehensive tax reform will decrease.
The thinking goes like this: if the House passes a repeal bill, and the Senate subsequently passes a bill, that's a clear positive for the markets because it greatly increases the chances for a tax-reform bill.
Down the road, if the House passes a bill but it fails in the Senate or in any compromise bill with the House, tax reform is still alive but will be more difficult.
Finally, if the House vote fails, that's a clear negative for the markets and would lower the chances for tax reform. Of course, the House could postpone the vote and bring up a new version in the weeks ahead and keep attempting to pass it, but the leadership is certainly not signaling that is an option and that would again cause considerable delay and push off tax reform even further.
It's not just lowering the odds, it's lowering the chances of the magnitude of changes you might be able to get through.
In theory, it should be a lot easier to get a tax bill through. After all, with the repeal of Obamacare you are taking away benefits like tax credits and Medicaid eligibility, and with a tax bill you are providing a tangible benefit in the form of tax cuts.
That would seem a lot easier. There would seem to be a lot more support for tax cuts of some kind than repealing Obamacare.
Unfortunately, if the Democrats stay united and are opposed to a corporate tax cut, that may not be the case.
Win or lose on the vote tonight, it seems the House Freedom Caucus has been sufficiently emboldened to be a thorn in the side for a tax bill as well. Here's FBR's Ed Mills: "If the Freedom Caucus is able to buck party leadership (and, in particular, President Trump) on healthcare reform without suffering politically, it is more likely that the group will complicate tax reform."
The problem is obvious: the Caucus is opposed to anything that might increase deficits, and the tax bill could easily increase the deficit. It all depends on the fate of a border-adjustment tax and the corporate deductibility of interest to offset the loss of revenues from a tax cut. If the border-adjustment tax is dropped — as many are proposing — a lower corporate tax rate would have to be far moderate than the drop from 35 percent to 20 percent that has been proposed.
Don't get me wrong — everyone agrees the odds of a tax cut are still high. But while a tax cut of 30 percent from 35 percent would certainly be beneficial, it is far less than the cut to 20 percent the market had been anticipating.
These are moments of high drama for the markets!