Harris, Dem sweep could mean a $2.2 trillion tax hike for S&P 500 companies

By Chris Matthews

'Investors should pay heed to Democratic prospects,' Cap Alpha's Lucier says

Polls show the presidential race to be a toss-up - but whatever the outcome of the race for the White House, a favorable Senate map means that Republicans are heavily favored to retake control of the upper chamber of Congress.

Such a scenario would likely thwart Kamala Harris's policy ambitions if she were the victor, and potentially magnify Donald Trump's agenda if he were to win.

Capital Alpha analyst James Lucier, however, warns investors not to discount a Democratic sweep of the national races - and the vast changes it could bring to the corporate tax code.

"A Democratic sweep with at least a 50-50 Senate remains perfectly possible," Lucier wrote in a Thursday note to clients.

While polls show Democrats trailing in races for key states like Montana, "Democrats have a massive fundraising advantage in the campaign so far, and what looks to be a superior ground game, so investors should not take a Republican sweep or divided government with a Republican Senate for granted," Lucier said.

If Democrats were to hold on to the Senate, he added, they'd do so without the votes of independent Sens. Kirsten Sinema of Arizona and Joe Manchin of West Virginia, who caucus with the Democrats and kept in check President Joe Biden and his party's desire to raise the corporate tax rate. The pair are retiring at the start of next year.

"Investors should pay heed to Democratic prospects," Lucier argued, because they have "consequential" plans for reforming the tax code.

"Democrats plan to increase taxes on corporations and high-income individuals, and because these tax increases will be paid with tax cuts for low-income Americans, Democrats would have a good chance of enacting much of their agenda even with razor-tight margins in Congress," he wrote.

On the corporate side, Lucier sees Democrats as most likely raising the corporate rate from 21% to 25%, below the 28% level proposed by Harris.

"By showing apparent moderation on the corporate rate, the Democrats might gain the additional leverage they need to increase other business taxes that are not as well understood by the public, but do raise considerable revenue," he added.

Those include increasing the corporate alternative-minimum-tax rate from 15% to 21%, repealing a deduction for foreign-derived income, raising the tax on buybacks from 1% to 4%, and taxing companies that try to shield income in low-tax havens.

Lucier's base-case scenario is that a Democratic sweep would lead to corporate tax hikes totaling $1.7 trillion over 10 years. If congressional Democrats get aggressive and push for the 28% rate, as Vice President Harris has proposed, that could lead to $2.3 trillion in new revenue from the corporate sector.

"Vice President Harris and Governor Walz's plan will raise the corporate tax rate to 28% - still well below the rate that was in place before the Trump tax cuts under both Democratic and Republican presidents," the Harris campaign noted in its policy pamphlet released Wednesday.

The campaign noted that these tax increases are needed so corporations "pay their fair share" and to enable investment in programs like Social Security, Medicare and expanded benefits for families with children.

The effects of the Trump tax cuts in 2017, which dropped the top rate from 35% to 21%, were huge - especially for the large companies that make up stock-market indexes like the S&P 500 SPX.

The median effective tax rate for S&P 500 companies fell from 31.2% in 2017 to just 20% in 2018, according to John Butters, senior earnings analyst at FactSet.

In the first quarter that the new tax law was effective, the changes saved S&P 500 companies $2.8 billion in taxes, according to a 2018 Bloomberg analysis.

Critics observed that companies plowed the lion's share of their tax savings into share buybacks and not, as hoped, into expanding their businesses and hiring new workers.

Google parent Alphabet Inc. (GOOGL) (GOOG) realized $1 billion in savings in that quarter alone, while Bank of America Corp. (BAC) saved $709 million. Netflix Inc. (NFLX) saw its effective tax rate fall from 20% to 3%, while Ford Motor Co. (F) fell from more than 12% to just 3%.

The changes helped make stocks look cheap by historical comparison, with the price-to-earnings ratio of the S&P 500 falling from 20.85 to 17.62 from 2017 to 2018, according to FactSet.

-Chris Matthews

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09-26-24 1338ET

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