Investment Strategy Brief:
Coming Up, on Capitol Hill

Below is a transcript of this week’s video.

Hello, this is Ilona Vovk with Investment Strategy at Glenmede.

In Washington, there's significant buzz around a proposed tax bill, referred to as the Tax Relief for American Families and Workers Act. This bill aims to inject about a net $118 billion into the economy during fiscal year 2024 through a series of tax provisions and credits.

Under the hood, the bill seeks to restore business investment by retroactively reinstating immediate expensing of domestic research and development (R&D). It also adjusts interest deduction limitations, effectively increasing the amount of interest businesses can deduct as an expense, and makes all new capital equipment purchases fully deductible, thereby permitting businesses to depreciate certain equipment more swiftly than current laws permit.

The bill also targets households through a minor expansion of the child tax credit, where the bill would increase refunds, expand eligibility, and adjust the child tax credit to account for inflation…… AND there is also some assistance for disaster-impacted communities in the bill as well. Lastly, the bill would impose some Employee Retention Tax Credit restrictions that would offset some of the spending. This net injection of about $118 billion equates to a notable 0.4% of U.S. GDP.

Now while the bill is front-loaded with these tax savings and credits for businesses and individuals for the first two years, it is designed to be deficit-neutral over the coming decade due to lower tax savings by the same businesses and consumers in the remainder of the 10-year period that follows.

Well Glenmede’s Leading Indicator continues to point to a modest decline in the economy in the next 6 to 12 months. Such projections reflect the trends in its components, which includes business surveys, consumer sentiment, industrial conditions, home building activity and even the lagged effect of monetary policy. Now, while Glenmede’s LEI still expects a contraction in GDP this year, fiscal stimulus, which isn’t a direct input into the model could help close the gap at least to some extent.

Now although the bill is designed to stimulate economic growth, the Federal Reserve's commitment to controlling inflation through tighter monetary policies might moderate some of the bill's intended effects on GDP. Although we will have more stimulus in the economy that may cause higher rates for longer.

The House is expected to vote on the bill within the current week. If it secures bipartisan support, the Senate is likely to follow suit, with a resolution potentially arriving in early to mid-February 2024. At this stage, the bill's passage remains uncertain until at least the House casts its votes. The push behind the bipartisan backing for these tax credits may be twofold: many members of Congress are gearing up for elections this year, and there's a concerted effort from the current administration to energize the economy in this electoral period.

To briefly summarize, the Tax Relief for American Families and Workers Act of 2024 has been gaining momentum in Congress; the provisions proposed primarily focus on reforms to corporate taxation that incentivize investment, but there are also some revisions to the Child Tax Credit; The tax package, along with the backlog of outstanding Employee Retention Tax Credit payouts, could amplify fiscal stimulus in 2024; Currently Glenmede’s LEI expects a contraction in U.S. GDP, but fiscal stimulus could help close the gap at least to some extent. It is important to also note that this stimulus could pose a challenge for the Federal Reserve, complicating the timing of cuts pushing rate adjustments into the back half of 2024.

And with that, thank you for listening! And please don’t hesitate to reach out with any questions.