Goldman Sachs economists expect congressional tax legislation to make corporate tax cuts effective in 2019 and new rules could encourage U.S. companies to issue more debt overseas.
"A 20 percent corporate rate continues to look likely, in our view, but we do not expect the cut to take effect until 2019," the economists wrote. But some aspects of the tax legislation would take effect in 2018, including the ability of companies to fully expense capital expenditures.
"Given the incentive for companies to pull forward deductible expenses into 2018, the one-year delay combined with full expensing of equipment capex would create a more important incentive for capex in 2018 than prior capex incentives enacted by Congress over the last 15 years," they wrote.
In their note, the economists said the plan would indirectly encourage companies to issue more debt overseas.
"Along with limits on the U.S. share of worldwide interest expense and the indirect effects of a 20 percent rate and changes to taxation of foreign profits, companies will have a greater incentive to issue debt abroad than they do under current law," they wrote.
Part of the reason is that the economists expect Congress to adopt a plan to limit the deductibility of net interest to 30 percent of EBIT, which was in the Senate bill and is more restrictive than that of the House bill.
Moody's separately said the Senate plan to limit interest deductions would impact leveraged borrowers more than the House bill. Moody's said limits on interest deductibility would also make private equity buyouts less attractive, since interest deduction is an important aspect of the strategy to buy companies in high-debt deals.
The Goldman economists also said the estimated revenue gain from congressional plans to limit state and local tax deductibility could be overstated.
"The estimated revenue gain from limiting state and local tax (SALT) deductibility could be overstated if states adapt to the new restrictions. It is difficult to predict how and when states will adapt to the changes, but they have an incentive to do so," the economists wrote. "As the limitation of SALT deductability is one of the largest sources of new revenue in the tax reform legislation, the proposed tax cut could turn out to be much larger than expected if states successfully adapt to the changes."