The American Jobs Plan: Five Investor Takeaways

Published April 2, 2021. We will continue to monitor new developments and update this article as appropriate.

The widely anticipated unveiling of the Biden administration’s ambitious infrastructure bill took place March 31 and included a broad set of programs aimed primarily at America’s physical infrastructure. We believe that the plan as released represents an initial offer with plenty of room for some necessary negotiation. We also expect that moving this complex bill through the reconciliation process will be challenging and take several months. And as the contours of the negotiation process are revealed over time, investors will begin to anticipate impacts on growth, inflation and interest rates.

Below are five key takeaways from the bill:

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Big and Bold:

Biden’s plan, the American Jobs Plan, includes $2.25 trillion in spending and a potential additional $400 billion in energy-related tax credits. It is focused on America’s roads, bridges and airports; green/renewable energy; expanded broadband accessibility; manufacturing onshoring; and workforce modernization. On the spending front, it seems that there is something in the plan for everyone to both love (e.g., repairing crumbling physical infrastructure has broad, bipartisan support) and hate (e.g., progressives are disappointed that green energy initiatives are not bolder). This plan is really a case of expecting the expected and delivers on promises made during President Biden’s campaign and the early days of his presidency.

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Paying (for) the Bill:

An immediate source of contention between Democrats and Republicans is the plan to pay for this far-reaching and expensive proposal. President Biden intends to partially finance it with changes to the corporate tax code. These changes, most notably, focus on raising the corporate tax rate from the current 21% to 28% and eliminating some of the tax loopholes that the administration believes encourage U.S. domiciled corporations to shift profits and jobs offshore. Incentives to bring jobs back onshore are also embedded in the proposal.

Both the Business Roundtable and the Chamber of Commerce have weighed in, stating a preference for a user-based revenue plan versus a broad-based corporate tax hike. Interestingly, the bill as proposed includes 15 years of tax increases — almost double the time period needed to pay for an eight-year spend. This extension is necessary in order for the administration to use the reconciliation process to pass the plan with a simple majority vote in the Senate while addressing concerns about the spending’s impact on the deficit and the desire to completely offset it. Over a more normalized 10-year period, the tax hikes cover only 65% of the cost.

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Impact on Growth:

The spending is scheduled to span eight years, potentially providing a meaningful boost to economic growth in the early years, with the impact petering out over time and being less certain over the long run. Although the intuition is that infrastructure spending is a boost to growth and productivity, Congressional Budget Office (CBO) research may provide a cautionary tale. While the proposed tax hikes will partially fund the plan, a gap filled by debt-financed deficit spending, not cuts to the discretionary budget, will remain. Ultimately, this may “crowd out” private investment and put a drag on economic growth. In addition, CBO research suggests that a dollar of federal spending results in only $0.67 of actual investment as state, local and private sector entities reduce their planned spending. Although never a fan of the “this time it is different” thinking, there are elements to the proposed plan — under the expanded definition of “infrastructure” — that fall outside of the typical brick and mortar infrastructure spending that may have longer, and stronger, impacts to growth through the employment and productivity channel. This is particularly true if President Biden is successful with the second plan around human capital infrastructure.

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Impact on Earnings:

There are a lot of moving pieces to the corporate tax puzzle, but as proposed, the tax hikes will have a negative impact on earnings for the S&P 500, a benchmark that skews toward non-U.S.-generated revenue and is comprised of very large companies. While difficult to predict with precision, and under the expectation that the tax proposals may ultimately change and be watered down in the negotiation process, we anticipate a 7-9% hit to S&P 500 companies’ bottom line.

Of course, there are several caveats. First, the timing of the proposed increases is unclear. Will the hikes be phased in? And second, it is likely that the 28% corporate tax rate in the plan as announced represents a starting bid. It is already clear that room for negotiation exists.

All that said, under the current proposal, and assuming a 2022 enactment of the full 28%, we can expect the S&P 500 earnings estimate to fall from roughly $200 to $184. This is based, however, on the current estimate. Given the strong momentum we are seeing in the U.S. economy, and more broadly around the world as reflected in strong purchasing managers index (PMI) data, it is likely that the 2022 earnings estimates may rise as we move further into the re-opening phase.

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What About Taxes on Wealthy Households?

Although tax increases on wealthy families was not a component of the American Jobs Plan, we expect a second plan to be released sometime in the next several months, with a focus on human capital infrastructure — at which point taxes will once again very much be on the table. This human infrastructure plan will include measures to address prescription drug pricing, education (universal pre-k), universal paid leave and an expansion of the Child and Earned Income Tax Credit. The plan may come at an estimated $1-$2 trillion cost, funded partially by tax increases on wealthy households, with a focus on higher taxes on income and capital gains. As always, we preach the importance of being prepared, and encourage investors to begin modeling some of these changes to assess potential impacts and illuminate planning opportunities ahead of any proposed changes.

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The American Jobs Plan

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The Northern Trust Institute

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Disclosures

This document is a general communication being provided for informational and educational purposes only and is not meant to be taken as investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions or inflation. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein.

LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Periods greater than one year are annualized except where indicated. Returns of the indexes also do not typically reflect the deduction of investment management fees, trading costs or other expenses. It is not possible to invest directly in an index. Indexes are the property of their respective owners, all rights reserved.

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