Goldman Sachs sees tax reform pushed to next year as GOP health bill creates setbacks

Key Points
  • Investment bank tells clients tax reform is more likely in first quarter of 2018 than fourth quarter of this year.
  • Risk of government shutdown is "fairly low" next week, Goldman says.
President Donald Trump discusses the federal budget as Treasury Secretary Steve Mnuchin (R) looks on in the Roosevelt Room of the White House on February 22, 2017 in Washington, DC.
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Goldman Sachs said Wednesday that it doesn't expect tax reform until the first quarter of next year as Republicans continue efforts to pass health-care legislation.

In a note to clients, the investment bank said GOP leaders appear intent on trying to pass a repeal and replacement of Obamacare. Goldman said passage of a new health bill, however, seems unlikely and sees Republicans possibly moving on to other issues by June.

"The renewed focus on health care has once again delayed tax reform efforts, however," Goldman said. "We still believe tax legislation is likely to become law, but continued delays suggest that enactment is likely to slip to early 2018."

The prediction came after Treasury Secretary Steven Mnuchin, a former Goldman Sachs banker, told the Financial Times earlier this week that the Trump administration's timetable for tax reform could be delayed after setbacks in health care.

He told the newspaper the target of getting tax reform to President Donald Trump by Congress' August recess was "highly aggressive to not realistic at this point."

"It started as [an] aggressive timeline," Mnuchin said in the interview. "It is fair to say it is probably delayed a bit because of the health care."

Goldman also said that Trump's tax legislation is more likely to be a tax cut with "limited elements" of reform.

"Namely a 25 percent corporate rate with provisions allowing for low-tax repatriation of foreign profits, incremental base broadening, and no border adjusted tax," the bank said.

Goldman's other predictions:

  • Believes the odds of a government shutdown next week are fairly low, but risk increases again at the end of September.
  • Trump's trade policies might be more incremental in the near term.
  • "Strong Democratic performance in recent special elections for the House of Representatives has generated discussion of more significant than expected Republican losses in the 2018 midterm election."

— With reporting by CNBC's Kayla Tausche.