Market Insider

As Senate wrangles, Goldman sees better than 50 percent odds for new tax law

Key Points
  • Goldman sees better than 50 percent odds that a tax bill will get enacted this year, and 80 percent by early next year.
  • The Goldman economists say that it will be important to see the Senate compromise with the House on state and local taxes, and provide a $10,000 deduction for property taxes.
  • Goldman and other strategists also expect Congress to temporarily extend spending authority through late December, from their Dec. 8 deadline.
Speaker Paul Ryan, R-Wis., center, appears during an a announcement in the Capitol's Rayburn Room on tax reform with Republican House and Senate leaders on September 27, 2017.
Tom Williams | CQ Roll Call | Getty Images

Goldman Sachs sees greater than 50 percent odds that a tax bill will be enacted this year and 80 percent by early next year.

The Senate Budget Committee was expected to vote on the bill later Tuesday, and there are expectations the bill would pass the full Senate by the end of the week. But GOP leadership continues to work on about the deficit and other aspects of the bill, and Sen. Ron Johnson, both on the budget committee.

Goldman's economics team said a final agreement between the House and Senate could become law by December if the Senate modifies its version to be more in line with the House on the issue of property taxes. Both bills take , an issue for high-tax states like California, New York and New Jersey. The House bill allows for a deduction for up to $10,000 in property taxes.

The question is how quickly the bills can progress. "If Senate passage slips beyond this week, enactment by year-end will become more difficult, in our view," the Goldman economists wrote.

Cowen political analyst Chris Krueger sees the same issue of property taxes as an important sticking point, and if that is modified, the House could vote on the Senate bill this weekend. But Krueger is skeptical that Congress will even approve a tax bill. It also has to take up a spending bill before the end of the session.

"Any slippage and momentum goes [the] other direction with Alabama Senate election and shutdown negotiations next week," he wrote in a note. Alabama voters go to the polls Dec. 12 to elect a new senator, and the Republican candidate has been weakened by accusations of unwanted sexual advances against teenagers.

Krueger notes that the current balance on the tax bill could be tipped if three GOP senators vote against it. There are about a half dozen who are on the fence or who could lean against it.

Greg Valliere, global macro strategist at Horizon Securities, said he sees 55 percent odds of tax legislation becoming law, and he says Sen. Paul Rand's support Monday was important.

"What concerns us is that the fixes required to keep dissident Senators happy will cost money, and a logical place to find money is the corporate tax, which may not reach 20 percent, as Donald Trump demands," Valliere wrote. "Any major changes could provoke Trump, who's a bull in this very delicately constructed China shop."

Valliere added, "We continue to nervously predict that the tax bill will get enacted."

Congress also faces a Dec. 8 deadline to extend spending authority and avoid a shutdown. Some analysts have raised that deadline as an issue for the progress of tax votes if there is a Congressional showdown over it.

But the Goldman economists said they expect a short-term extension of spending authority to Dec. 22, with a longer-term bill enacted later in the month or in January.

"Negotiations are underway to raise the caps on discretionary [defense and non-defense] spending by around $90 billion [0.5 percent of GDP] per year in FY2018 and FY2019. This would come in addition to the $44 billion the White House has proposed to spend on a third installment of hurricane relief, which would bring the total to $95 billion to date," the Goldman economists wrote.

Valliere also sees the potential for a short term extension in spending authority. He said key for the Democrats is a deal on immigration for "the dreamers" and an increase in domestic spending.

"This could become an irritant for the markets, which don't like uncertainty. Defense firms and other federal contractors have been in limbo since the fiscal year began on Oct. 1, and while they will get their increased funding, the issue is when. And for the Federal Reserve, a rate hike on Dec. 13 — amid concerns about a shutdown — could become a closer call," Valliere wrote.