The Tax Game is Afoot

A day after the Senate passed the motion to proceed on addressing Obama-care in the Senate by 1 vote, the Big 6, House Ways and Means Chairman Kevin Brady (R-Texas), Senate Finance Committee Chairman Orrin G. Hatch (R-Utah), House Speaker Paul D. Ryan (R-Wis.), Senate Majority Leader Mitch McConnell (R-Ky.), Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn announced an agreement on principle of enacting tax reform. The House abandoned border adjustment, which taxes imports but not exports, which means Republicans in the House, Senate, and White House will have to agree on additional revenue raisers and base erosion measures. The border adjustment tax would raise more than $1 trillion, according to estimates. So lawmakers will be looking at the Camp tax reform proposal which focuses on more traditional eliminations of tax deductions to make up the revenue loss. They will likely look to scale back capital expensing provisions, curb rate reductions, and pass on repealing the estate tax in order to make up for some of the lost revenue.

A central goal of the GOP-led effort is to overhaul the tax code to significantly lower rates and move to a territorial system, where income is taxed in the country where it is earned. The high-level statement is the result of meetings between the Big 6. The group is working to roll out a tax plan in September.

Next steps in putting together a plan is to agree on a joint blueprint, including revenue raisers, for overhauling the tax code. The document referenced “unprecedented expensing,” a step down from the full and immediate expensing that had been part of the House GOP tax plan. This is a change of timing for writing off tax expenditures. The statement didn’t mention the interest deduction for businesses, which the House blueprint would have eliminated. Loss of the interest deduction would be a permanent change impacting financing through debt, not just a timing difference.

Republicans on the tax-writing committees in the House and Senate, Ways and Means and Finance, will be using the August recess to meet at President Ronald Reagan’s ranch in California to discuss more details of the plan.

The ranking Democrats on both the tax-writing committees complain they are being left out of the discussions unlike the last tax reform plan written in 1986. Of course, the House was controlled by the Democrats while Republicans were in control of the Senate and Ronald Reagan was in the White House.

The Senate has yet to make public its vision on tax reform other than an aversion to border adjustment tax, but in conversations with staff on the Senate Finance Committee this week, they identified Chairman Hatch’s corporate integration proposal for dividend deductibility and Senator Thune’s Invest legislation on capital recovery as possible signals for what they will be considering. In addition, while endorsing a more territorial system they said that the more traditional “income tax” approach was preferred by the Senate.

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                    FROM THE CHART ROOM

                    Natural Gas Surges Ahead, as Crude Oil Futures Drop

                    natural-gas-gains-ground-over-oil

                    Oil prices have been lousy for so long that U.S. producers are hoarding unfinished wells rather than pumping crude out of them. In the natural gas patch, just the opposite is happening. While the energy slump has idled lots of wells for both commodities, their economics have diverged. Oil remains at half its price in 2014, leading to a record backlog of drilled-but-uncompleted wells spread across shale formations where fracking brought on a surge in crude production. Meanwhile, gas futures are almost double last year’s low, and the so-called fracklog of wells in the Marcellus gas fields of Pennsylvania and West Virginia is shrinking as drillers there unleash supplies to take advantage of higher prices. By the end of June, the fracklog in the Marcellus was the smallest in the three and a half years since government data has been collected. The drop portends a production boom that could imperil bullish gas bets, which jumped to a three-year high in May on speculation that a hot summer, new pipeline capacity and rising exports of the fuel would boost demand. When prices were dropping in 2014 and 2015, drillers left a growing number of wells unfracked in the Marcellus, America’s biggest gas play. With the market up and new pipelines promising to shuttle more of the fuel to market, the backlog has fallen from 831 wells in July 2015 to 643 last month, government data show. Fracking them is the cheapest way to bring on new supply because the money has already been spent to dig the hole. Some of the wells were completed to satisfy delivery contracts, but there was also the incentive of higher prices. Gas futures in New York have rallied 81 percent since touching a 17-year low in March 2016 of $1.611 per million British thermal units. Futures traded at $2.922 as of 8:10 a.m. Tuesday. Not only are the nation’s gas explorers bringing wells online at a faster pace — they’re also drilling new ones. Output from the Marcellus is set to reach a record 19.8 billion cubic feet a day in August, the U.S. Energy Information Administration forecast this month. Some of that supply is being sold outside the U.S. While the country was a net importer last year, exports of American shale gas have climbed to a record via pipelines to Mexico and Canada and ships carrying the super-chilled fuel to other countries. Read more on Bloomberg


                     

                     

                    Michael Best Strategies’ Energy Team

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