Which investments would GOP tax plan help -- or hurt?

Under the tax blueprint recently unveiled by President Donald Trump and Republican leaders in Congress, a bunch of investments would benefit -- and others would not.

Small-capitalization stocks and financial services shares likely would do well, for instance, while homebuilders face an iffier road. Moody's Investors Service on Monday pointed to low-grade corporate bonds and municipal debt as probable losers. 

Certainly, passage of any tax bill is far away. Predictit, the market that seeks to forecast major public events, gives a one-in-three chance that a tax overhaul will occur this year. 

On Capitol Hill, lawmakers are preparing to vote on a budget resolution that will provide a path for eventual tax changes, with the House of Representatives set to pass its version of the measure by Thursday and the Senate budget panel aiming to begin writing its own bill late this week.

The GOP tax plan, which Mr. Trump introduced in Indiana last week, was a mere nine pages and scant on details, which means Congress will flesh it out, along with an enormous number of lobbyists. 

One previously discussed feature in an earlier iteration was conspicuous by its absence: a border adjustment tax (BAT), which sought to impose a special levy on imported goods. A favorite of House Speaker Paul Ryan, R-Wisconsin, it was widely pilloried over the summer by retailers and others dependent on merchandise made abroad.

The reason: The proposal would jack up prices. "Leaving off BAT was a big help to importers," said Garrett Oakley, a financial planner with online investing service Betterment. 

Here's a rundown of which investments the tax plan would help or harm, assuming that it becomes law in a similar fashion to the current outline:

Small-cap stocks: good. The Russell 2000, which tracks smaller companies, leaped 2 percent with the announcement of the GOP plan last week and on Monday rose another 1.25 percent. Small-caps tend to lack the legions of clever accountants to get the best tax breaks, which big companies specialize in. According to Nuveen Asset Management, large-caps pay an average 26 percent tax rate on federal taxes, while small-caps fork over 32 percent. 

But the GOP framework envisions dropping the corporate rate to 20 percent from the current 35 percent -- a huge boon to the small-fry. "That 20 percent would be a drastic improvement," said Ryan Detrick. senior market strategist at LPL Financial. 

Utility stocks: bad. For sure, lower corporate tax rates would help the public utilities that provide electricity and other energy sources by lessening the IRS's take. Nevertheless, higher resulting profits could lead to reducing the rates that these highly regulated companies charge. 

Over the past three weeks, the iShares US Utilities ETF (IDU), an exchange-traded fund that follows utilities, is down almost 5 percent as word of the plan leaked out.

Fatter earnings would prompt the state regulatory bodies that oversee utilities to respond with a "clawback on rates" consumers pay, said Thomas Forsha, co-chief investment officer of River Road Asset Management. 

Financial stocks: good. The argument here is that the economy would grow faster, thanks to a tax cut, which in turn would produce higher interest rates. The banking industry in particular would realize a nice increase in earnings as the spread widens between the interest rates it charges borrowers and the (lower) rates it gives depositors. 

Homebuilder stocks: bad. Home construction stocks have surged all year long amid high demand for housing and low mortgage rates. The iShares US Home Construction ETF (ITB) is up 24 percent this year, double the pace of the S&P 500. 

A case can be made, however, that one feature of the Republican plan could crimp this performance -- eliminating deductions for state and local taxes. Local taxes chiefly mean property taxes. 

While the plan preserves the deduction for mortgage interest, the end of special treatment for the property levy could chill demand for home purchases, the brokers who sell houses warn. The National Association of Realtors said last week the plan could put "home values across the country at risk." 

Companies with cash overseas: good. Large U.S. companies hold some $2.6 trillion in cash overseas, owing to the 35 percent U.S. corporate tax rate, among the world's highest. Lowering the rate to 20 percent would encourage many to bring the money home. 

Judging from what happened during the tax holiday Washington offered U.S. multinationals in 2005, much of that money would go to buying back stock and pumping up dividends -- a plus for shareholders.

Junk bonds: bad. The GOP plan refers, in a terse two sentences, to limiting the deduction companies take for debt interest. That's bad news for corporate bond issuers and bank borrowers, especially for less creditworthy issuers and those that issue what are called junk bonds. 

Such a development, said River Road's Forsha, would "make their debt less attractive." In other words, prices for it could tumble.

Municipal bonds: bad. Ending the tax break for state and local levies, by Moody's  reckoning, would be a "negative for the public finance sector by raising the effective cost of state and local taxes for many taxpayers and reducing disposable income." Municipal bond prices, too, likely would tank and the interest they charge would soar.

Still, given the Republican congressional leadership's inability to repeal and replace Obamacare, the fraught subject of taxation may yet prove to be a goal that's out of reach. The best approach, Forsha said, "is to embrace the uncertainty." 

  • Larry Light

    Larry Light is a veteran financial editor and reporter who has worked for the Wall Street Journal, Forbes, Business Week, Money, AdviceIQ and Newsday.