(GEO, CXW) DC Quick Takes: Cap Gains/Dividend Taxes, Reconciliation and Ukraine
We don’t see the top long-term 20% capital gains tax or the 20% divided tax rate coming down in the tax bill next year, despite President-elect Trump mentioning this policy goal in response to a question this morning at the NYSE.
It’s hard to see the rates falling much lower than 20%. We doubt any potential tax proposal would have them being reduced to 0% or 10% for the highest-income bracket, and a political fight to bring them down to 15% seems unlikely and unproductive for the GOP.
However, we think the odds would improve, though still not above 50/50, if the cost of extending the tax bill is less of a concern to congressional Republicans. Recall that internally, Republicans are debating whether to use current policy, rather than the current law, in their baseline to determine how much of the tax bill needs to be offset.
If Republicans opt for current policy, they will assume that the 2017 Tax Cuts and Jobs Act (TCJA) does not expire at the end of next year but instead continues indefinitely. This assumption means — the bond market notwithstanding — that Republicans would not need to offset the ~$4.6 trillion in costs to extend the TCJA as they would under a current law budget baseline. While using current policy, instead of law, provides a potential easy out for the GOP, such an idea is likely to be a tough sell given the deficit impacts
We expect capital gains and dividend taxes to remain part of the debate well into tax-bill discussions. We note that in the event Republicans did use current policy in their baseline, additional tax cuts for capital gains and dividends potentially easier to offset but are still unlikely.
One vs. Two Reconciliation Bills
We are moving our odds to 65% that Congress moves two reconciliation bills next year, despite many House Republicans opposed to such a strategy. Recall that some GOP leaders want to quickly pass a reconciliation bill that would: 1) provide more funds to implement Trump’s immigration policy, which would likely be positive for private prison stocks Geo Group (GEO) and CoreCivic Inc. (CXW); 2) potentially add funds for defense; and 3) some energy provisions.
There have been few details about the substance of this first reconciliation bill. However, Trump is unlikely to secure the funding to implement his immigration policy, which some have estimated could cost as much as $300 billion, until Q3 or Q4 unless an early non-tax reconciliation bill is passed early next year.
On the defense front, recall that yesterday the House passed the National Defense Authorization Act (NDAA), which provides $884 billion for FY25 for defense. Many Republicans and some Democrats were upset that the additional $25 billion included in the Senate’s NDAA wasn’t adopted. There have been reports that this first reconciliation bill could incorporate this additional $25 billion, which would also have the benefit of strengthening GOP’s hand in negotiating the rest of the FY25 spending levels.
With regard to energy policy, ideas like permitting reform are unlikely to be allowed in reconciliation, but we think opening up ANWR and other federal land to oil and gas drilling is permitted under budget reconciliation rules.
It is unclear if Republicans will try to help pay for the overall bill by eliminating some of IRA’s green energy tax cuts, but we suspect those offsets would be on the table.
Ukraine
President-elect Trump’s recent comments about Ukraine fit in with our view that the president is likely to get tougher with Russia as a lead up to expected negotiations on trying to end the war.
We wouldn’t be surprised to see Trump call for additional aid to Ukraine as a threat to Russian to come to the bargaining table.
Ukraine will very likely have to give up territory in any negotiated settlement and NATO membership is unlikely, though some type of Ukrainian territorial integrity is likely to be guaranteed.
Finally, we’d expect this to play out longer than might be anticipated, with negotiations probably not concluding until at least 2026, assuming both parties agree.