RANDY FREDERICK: Getting tax reform done in 2017 was once considered a real long-shot. Not anymore. Mike Townsend joins me to the December 18th Schwab Market Snapshot to give us his take on what the odds of passage really are, and when it might happen.
So, Mike, I know you’ve been following this tax bill closely, and it seems like we’re very close to the finish line. So what’s the timeline for getting this bill through Congress and signed into law? And is there any chance that the whole thing could collapse by the end of this week?
MIKE TOWNSEND: Well, Randy, the plan right now is for the House of Representatives to vote on the bill on Tuesday, that’s December 19th. And all indications are that Republicans who have a large majority in the House do have the votes to get it passed. Then it will move on to the Senate, and the plan is for a vote either late Tuesday, or perhaps sometime Wednesday. Under the Senate rules, there are up to 10 hours of debate, and it’s not clear whether all 10 hours will be used, so that makes it hard to put your finger on exactly when a final vote will take place.
Now, in the Senate, where Republicans have a 52-48 majority, they are confident that they have the votes to pass the bill. Senator Bob Corker from Tennessee, who was the only Republican to vote against the bill when it passed the Senate earlier this month, has announced that he will vote for the compromise. And Senator John McCain from Arizona, who is being treated for cancer, went home this weekend to Arizona, and is not planning to be back in Washington unless absolutely necessary. But I think Republican leaders are confident that they have the votes even without him. So that means once it passes the Senate, it can go to President Trump for his signature, and it’s widely expected that he will sign it into law before the end of this week.
RANDY: Well, now I know a lot of negotiations and a lot of changes have taken place over the last couple of weeks or so. Assuming this bill does become law, what are the key elements that investors need to be made aware of?
MIKE: Well, for investors, probably the most significant development was that the provision that would have required investors to use the “first in/first out,” or FIFO method for calculating their cost basis when they sell shares, that provision was dropped from the final bill. It was part of the Senate bill, not part of the House bill, and the negotiators decided to drop it from the final bill. So that means that investors will still have the choice about which shares they want to sell when they sell.
On other issues important to investors, it’s really about what’s not in the bill. So no changes to the tax rate for capital gains and dividends, and no changes to retirement savings rules, so retirement savings contribution limits stay the same. No requirements that retirement savers use Roth accounts or anything like that.
On other issues, I think everyone probably knows, you know, individual tax rates lowered for virtually all taxpayers and a new top rate of 37%, a new corporate rate of 21%, and then negotiators reached compromises on several contentious issues, such as estate and local tax deduction and the mortgage interest deduction. And I detail all of those in an article that can be read on the Insights & Ideas tab on Schwab.com.
It’s important to know that the new rules go into effect January 1st of 2018, so it won’t affect your 2017 taxes, but these will go into effect here in just a couple of weeks, assuming the bill does get signed into law.
RANDY: Okay, on a completely different topic, it seems that yet, again, another government shutdown is looming at the end of this week. So will Congress be able to come to an agreement to keep the government open over the holidays?
MIKE: Well, not surprisingly, right now, the focus is on getting the tax legislation across the finish line. But Congress is working to make sure that the government shutdown, which would happen at the end of Friday if government funding is not extended—they’re going to make sure that that doesn’t happen.
In the House of Representatives, they’re pushing forward with a package that would fund defense spending through the rest of this fiscal year, through September of 2018, while funding the rest of government operations just for a couple weeks until mid-January. That’s something that democrats don’t support, and that’s important because in the Senate you need at least eight Democrats to join with all the Republicans to get to that 60-vote super majority that’s filibuster-proof. It doesn’t seem like that will happen.
So I think the fallback position is just a short-term straight extension of all government funding through mid-January, and that means that, you know, Congress won’t have to deal with this after the Christmas holiday, between Christmas and New Year’s, they can come back in January. I think that’s likely to happen. It’s not a slam-dunk. There is some possibility we could have a short shutdown over Christmas, but at the end of the day, I think they will get this short-term extension to January finished.
RANDY: As always, Mike, thanks, again, for that great insider perspective. Listen, you can read more from Mike in the Insights & Ideas section of Schwab.com. And don’t forget, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.