The newly passed tax reform legislation has reduced the statutory corporate tax rate from 35% to 21%. While this reduction stands to boost corporate cash flow, Moody’s Investors Service’s analysis of the legislation has highlighted certain tax code changes that could create additional credit positives or negatives for certain sectors.
The legislation is credit negative for the federal government, as it is expected to add over $1.5 trillion to the federal deficit over the next 10 years. Moody’s predicts that the federal government’s debt-to-GDP ratio will rise by more than 25 percentage points over the next decade, up to over 100%.
Moody’s expects the U.S. economy to grow by 2% to 2.5% in 2018 and 2019 but predicts that the existing tax cuts will add only one- to two-tenths of a percent of GDP to the nation’s aggregate economic growth. This growth will be driven by higher household consumption from individual tax cuts. Moody’s doesn't foresee corporate tax cuts making a meaningful impact on business investment spending.
Financial institutions and their shareholders largely stand to benefit from a decreased tax burden, but the legislation’s impacts are company-specific, according to Moody’s. Asset-management firms and insurers are among the institutions expected to experience a net credit positive. Housing finance agencies may experience a drop in equity investment, as increased corporate cash flow may deincentivize the tax credits that fund multifamily housing.
For nonfinancial companies, the corporate tax rate cut and capital spending deduction will more than make up for the new limitation on interest deduction for all but the most highly leveraged U.S. companies, says Moody's.
At the individual level, the new, $10,000 limit on state and local tax deductions will reduce or eliminate the effect of lower federal tax rates for many taxpayers. Moody’s predicts an increase in anti-tax sentiment and wider tax rate disparities across states and metros, alongside a negative credit impact on state and local governments, nonprofit hospitals, housing finance agencies, and private colleges. Higher standard deductions and a new limit on mortgage interest deductions also stand to deincentivize homeownership.
Investor-owned utilities will suffer from reduced cash flow from lower tax rates, particularly the corporate tax rate, which would represent about a 40% fall in revenue collection for utilities.
Lower federal tax rates will support debt service capacity for corporate and individual obligors to structured finance companies, though a subset of obligors may experience tax increases. The new mortgage interest deduction and its effect on home prices may also create risks for companies that service residential real estate.
