Tax Cuts Hanging in the Balance as Republican Divisions Show

The failure of Donald Trump’s healthcare plan has brought tax reform to center stage, possibly speeding up eagerly-anticipated cuts, but also casting into doubt the president’ ability to strike consensus among divided Republican lawmakers.

European and Asian stocks markets, U.S. equity futures and the dollar all fell this morning as investors questioned the durability of the president’s policy agenda. “Incredibly, at a time when the Republicans control both the House and the Senate, we are faced with a position where internal factions mean Trump still cannot get the required support to make a meaningful impact as president,” said Josh Mahony, a trader at IG in London.

In a Twitter post on Sunday, Trump largely placed the blame for the healthcare failure on conservative Republican lawmakers, underscoring the extent of division in Washington.

Much of the confidence expressed by CEOs in a string of recent surveys was based on the expectation of a large reduction in the corporate tax rate from its current level of 35%. Repealing and replacing the Affordable Care Act was first on Trump’s queue, but now that it has failed, it’s ostensibly out of the way.

“We will probably start going very, very strongly for the big tax cuts and tax reform,” Trump told reporters on Friday. “That will be next.”

Previously, the administration had suggested it would attempt to get tax reform done by August, though failing to pass the healthcare bill will make that task more difficult. For one, the bill would have saved the government a lot of money, softening the impact of large tax cuts on the budget.

House Speaker Paul Ryan acknowledged recent events, meaning cutting taxes as planned won’t be easy. “Yes, this does make tax reform more difficult. But it does not, in any way, make it impossible. We will proceed with tax reform,” he said.

A recent survey of 100 CEOs by KPMG showed more than half don’t expect any tax reform to occur until next year. Lawmakers and CEOs remain deeply divided on whether to support a plan advocated by Ryan that would tax imports by 20%. CEOs in the retail sector remain unconvinced that any upward pressure on the price of imported goods would be offset by a strengthening dollar.

Kohl’s CEO Kevin Mansell last week became the latest leader to speak out against the so-called boarder adjustment tax, claiming it could increase the price of consumer goods by around 20%. “The impact on our customers is going to be massive,” Mansell told CNBC, adding that it also would erode the company’s profits.