The Trump administration's blueprint for the reform of America's tax system raises the possibility of wider federal deficits and higher debt levels, says Moody's Investors Service in a new report. However, the amendments would be credit positive for many sectors.
The blueprint, presented by administration officials on 26 April, was relatively light on details, but essentially provides a starting point for negotiations with Congress.
While the proposed tax cuts might boost economic growth in the short term, the effect would be unlikely to last long and wouldn't be sufficient to offset the reduction in government revenue.
Moody's has raised its forecasts for US federal fiscal deficits and debt load, assuming that some parts of the draft will be implemented and that the tax cuts won't be fully funded.
"Any unfunded tax cuts or expenditure increases would bring forward the weakening in US fiscal strength and the country's credit profile that we already forecast will happen due to rising entitlement spending," says Sarah Carlson, a Senior Vice President at Moody's.
For US non-financial corporations, the proposed cut in the corporate tax rate to 15% from 35% is positive because it would lower cash taxes. In particular, it would benefit investment-grade companies, which generally pay more taxes, often operate across multiple jurisdictions, and are less leveraged than lower-rated counterparts.
Positive for banks
A lower corporate tax rate would be positive for banks because it would boost their profitability. However, higher bank earnings would not necessarily mean higher capital levels, as banks would likely distribute the increased profits to shareholders.
All else being equal, a lower corporate tax rate would be negative for regulated utilities and their holding companies. The rates that utilities charge customers include a portion to cover taxes, but the amount that utilities actually pay in taxes is typically less.
The difference increases utilities' cash flow. At a lower tax rate, the spread between what utilities charge customers for taxes and what they actually pay will be reduced, shrinking cash flow in the future.