Wells Fargo (NYSE: WFC) stock climbed 3% on Tuesday as the Senate inched closer to passing a tax bill that could cut the corporate tax rate from 35% down to 20%.
Few companies would benefit as much from a tax cut as Wells Fargo. The nation's third-biggest bank by assets earned $21.1 billion over the trailing 12 months, according to data from YCharts.com. That's enough to rank Wells Fargo fourth in terms of the most profitable companies on the S&P 500 (SNPINDEX: ^GSPC).
The only companies that have earned more over this stretch are fellow bank JPMorgan Chase (NYSE: JPM) and two technology companies, Apple and Microsoft.
Because the S&P 500 tracks shares of the biggest and most profitable publicly traded companies in the United States, this means that only a handful of companies stand to gain as much from the tax reform efforts as Wells Fargo.
Even among big banks, Wells Fargo is positioned to benefit more, given that a larger share of its income comes from its domestic operations relative to, say, JPMorgan Chase or Bank of America, both of which have large investment banks that do business around the world. The implication is that a bigger share of Wells Fargo's income would likely be exposed to the lower corporate tax rate.
On Tuesday, the Senate Budget Committee voted along party lines (12-11) to advance the tax bill to the Senate floor. Whether it succeeds from there will come down to three issues.
The first is whether the full Senate can incorporate provisions that would stop the debt and deficit from ballooning in the event that the tax cuts don't generate the economic growth presupposed by the bill's drafters. This is the thing that is holding up Republican Sens. Bob Corker and Jeff Flake. It is also a concern to Republican Sen. James Lankford of Oklahoma.
"What if the growth estimates don't hit 0.4%? What happens? What should happen in the tax code to make adjustments? Every economist is guessing," Lankford said at a news conference. "We should build in the 'what if.' What if this doesn't work? What changes might be needed in the tax code in the days ahead to be able to adjust in what scenario? So if the revenues aren't coming in, should the rates change? All of those are in conversation."
The second issue concerns the so-called individual mandate, an aspect of the Affordable Care Act that penalizes taxpayers who don't have health insurance. A repeal of the mandate has been incorporated in the tax bill, but Republican Sen. Susan Collins is requiring that an accompanying piece of legislation pass to offset any negative impact on the price or availability of healthcare as a result.
Finally, Republican Sen. Ron Johnson has said that he's a "no" on the bill until it drops the tax rate on pass-through business entities to the same level as corporations. Sen. Steve Daines joins Johnson's opposition on this front. Johnson nevertheless voted to advance the bill to the Senate floor as a member of the Senate Budget Committee.
And then there's Sen. John McCain, who cast the decisive vote on the failed effort to repeal the Affordable Care Act. He's remained mercurial about his support for the tax bill, focusing his comments more on the legislative process as opposed to the merits of the bill itself.
These are a lot of loose ends to tie up, but Republicans are confident that they'll be able to get the bill through the Senate. And if that happens, few companies would benefit as much from the legislation as Wells Fargo, which goes a long way toward explaining why the bank's stock tripled the gain on the S&P 500 on Tuesday after the bill made it past the Senate Budget Committee.
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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. John Maxfield owns shares of Wells Fargo. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.