With the bill nearing the finish line, we don’t foresee material changes to our fair value estimates or economic moat ratings since lower rates are already baked into our models.
Many corporations, individuals, and President Donald Trump are likely to receive their holiday wish following the release of the conference report on the Tax Cuts and Jobs Act. The House of Representatives and Senate are now expected to vote on the final tax reform bill within the week.
Michael Wong, CFA, CPA, is director of equity research, financial services, North America, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.Elizabeth Collins, CFA, is Morningstar's director of equity research, North America. She is responsible for leading the firm’s team of North American-based equity research analysts.
As we expected, the political imperative for the Republican Party to have a major legislative win before midterm elections led to a series of compromises in the final bill that should ensure enough votes to pass the Tax Cuts and Jobs Act using budget reconciliation rules. Following approval from Congress, Trump can sign the bill into law.
We will adjust our valuation models for the final details of the tax reform bill after it’s passed, but the majority of the valuation effect of tax reform was incorporated into our models earlier this year when we implemented a 25% corporate tax rate assumption. Therefore, we don’t anticipate making material changes in our fair value estimates or our economic moat ratings.
Assuming the Tax Cuts and Jobs Act is signed into law, our thoughts going forward revolve around the longevity of the tax cuts and discerning differential effects on industries. There are definitely parts of the bill that should stimulate economic growth in the United States.
However, if the tax cuts do not pay for themselves through faster economic growth--and many studies of the tax reform bill project that the bill will lead to an increase in the national debt--then Congress may eventually have to raise taxes or cut spending.
2025 will be key for Congress, as many of the provisions benefiting individuals are set to expire at the end of 2025 unless Congress takes action to extend them or make them permanent. While the lower corporate tax rate will have a material, direct effect on corporate earnings, individual provisions will benefit certain industries more than others.
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