Companies should brace for change.
The 30-plus-year drought since the last tax code overhaul may be finally over as Congress sets out to vote on and place a now-finalized tax bill on President Donald Trump's desk.
The bill slashes the corporate tax rate from 35% to 21%, and also includes massive changes to how income earned or kept offshore is treated.
In other words, this week could be monumental for business accounts nationwide. Every industry could see effects — including HR. Here's a 60-second overview of what the bill could change, and where industry associations stand on it:
IMPACT: Tax reform is expected to impact several areas of interest to HR: paid leave, fringe benefits, automation and offshoring.
POSITION: The tax proposal could, on balance, be good for companies and in turn good for HR professionals. The industry has not taken a specific stance on the issue to date.
ANALYSIS: Tax reform is expected to impact several areas of interest to HR including some core issues such as paid leave, fringe benefits, automation and offshoring.
One proposal would give employers a tax credit equal to 25% of an employee's salary if it paid them during FMLA leave. There are several proposals to scrap deductions for benefits employers often are involved in, like transportation and relocation expenses.
Some thought the bill might create new tax incentives to encourage employers to create jobs. (That's what the Trump administration promised, after all.) Instead, it proposes to allow employers to write off the full value of machines right away, perhaps encouraging automation without an accompanying incentive for hiring humans.
The bill proposes to exempt some income from U.S. companies with operations outside the country. This encourages business to send work overseas, some experts have said.
HR will probably like the paid leave proposal, as it gets at an existing problem without a mandate. Instead, it's an incentive to do something many are already doing anyway. On the flip side, the fringe benefit exclusions do the opposite, creating a disincentive for employers to offer those benefits.
The automation and offshoring items are, on their face, good news for companies. Some, however, say they're not as useful without an incentive to hire people, too. After all, machines can't be upskilled when needs shift.
THE BIGGER PICTURE
The tax reform does not just affect HR functions. Changes are likely to have far reaching business implications, and HR executives need to know what headaches company leadership will face more broadly. Here's how the bill may alter other industries.
IMPACT: The GOP tax plan is largely a win for pharma and biotech companies, which stand to benefit from a lower tax rate on cash they have parked abroad.
POSITION: The trade group BIO backed the Senate version of the bill, praising the corporate tax rate cut. But plenty of big pharma CEOs have publicly stated their support for tax reform.
ANALYSIS: The industry will benefit in large part due to a reduced tax rate on foreign income, allowing companies to repatriate cash. Analysts estimate that large-cap pharma alone keeps nearly $98 billion offshore. The new plan lowers that rate from 35% to 15.5%.
During a 2005 tax holiday allowing companies to bring some profits back at a 5.25% tax rate, Pfizer Inc., Merck & Co. and Johnson & Johnson were among the biggest beneficiaries. A study later found companies tended to cut jobs and use the money for stock buybacks.
Some top pharma players, including Pfizer, have said they were holding off on any meaningful M&A this year until they had clarity on tax reform, since they can use the offshore cash for such transactions.
The new bill cuts the overall corporate tax rate to 21% from 35%. Yet, most biopharmas typically pay far less than the statutory rate already. Data compiled by a professor from NYU recently showed that across 164 drugmakers, the aggregate effective tax rate was 19.41% — so for most big pharmas, in particular, the lower rate will be a neutral/negative development.
Orphan drug credit: The final bill also trims the 50% write-off enjoyed by companies that develop orphan drugs to 25%. One version of the bill cut it altogether, so the trim is a win. The credit applies to R&D for rare disease drugs with the intent of spurring development in orphan indications.
Lisa LaMotta / BioPharma Dive
IMPACT: The public construction sector will benefit from the uninterrupted flow of private-activity bond financing, and both the contractors who are structured as pass-through entities and C Corporations will see significant tax relief.
POSITION: The retention of tax-free status for PABs, as well as favorable treatment of energy-related exploration and tax credits have some segments of the industry breathing a sigh of relief, but potential PAB use limits and the locking out of design professionals from being able to take advantage of the new, lower pass-through tax rate could result in some pushback.
ANALYSIS: The House GOP tax bill, passed early in November, took aim at PABs – a financing scheme that allows private entities developing public projects to borrow at the same tax-free rate as government agencies do – and eliminated them altogether. The Senate's version restored PABs, possibly driven by the expectation that they will play a big role in financing the president's $1 trillion infrastructure plan, but both chambers call for a termination of another popular finding vehicle, tax-exempt stadium bonds. Some states and municipalities rely on tax-free bonds for their contributions to the new construction and renovation of sports venues – often a condition of being able to snag a professional team – but, according to the Brookings Institution, the federal government loses out to the tunes of billions when projects that are financed this way.
The latest version of the reconciled bill also sets a new 21% tax rate for corporations, a break for everyone except those low-earners that currently pay 15%. But many construction companies are pass-through entities, a structure that allows owners to include business profits on their personal tax returns. The new tax reform measure gives those individuals a 20% break on that income, a bigger break that the House bill's rate of 25%. However, some in the industry were frustrated by a provision that professional service and consulting firms like architects and engineers to take that deduction.
The energy sector got better news when it was revealed that the Senate bill would reinstate the wind sector's production tax credit that the House bill eliminated. While the industry awaits the final version of the joint bill, word is that that credit, as well as one for the purchase of electric vehicles, will stay put. The measure also green-lights exploration in Alaska's Arctic National Wildlife Refuge.
Kim Slowey / Construction Dive
IMPACT: Tax reform could impact school funding, 529 plans, teacher deductions.
POSITION: For public schools, the proposal presents yet another threat to already-stretched funding, though teachers will retain an annual deduction for supplies.
ANALYSIS: Under current laws, taxpayers can deduct what they pay in state and local taxes, a provision that naturally benefits wealthier Americans who pay more. The updated tax bill would allow single and married taxpayers to deduct up to $10,000 in state and local taxes—property, sales or income. The earlier proposal would have allowed filers to deduct all state and local taxes.
An earlier proposal would have eliminated that deduction, which education analysts suggested could lead to increases in other taxes and likely impact state and local funding for education. The National Education Association had predict a cost to public schools of $370 million over 10 years, leading to job cuts for teachers. The latest proposal would cause less of a hit, but could still impact state spending.
The final bill also doubles the Child Tax Credit from $1,000 to $2,000, and extends the deduction for families earning up to $400,000 per year. Up to $1,400 of the credit is also refundable, which puts money into the hands of low-income families who would not otherwise earn enough to actually owe federal taxes.
Additionally, families putting money away in 529 plans for their children’s college education could withdraw up to $10,000 without a penalty in order to pay for private school or even home-schooling expenses. Opponents say the provision doesn’t help most families and can hurt savings for college in long run.
Finally, the bill will leave in place a teacher deduction of $250 annually for money spent on school supplies out of their own pockets. Earlier proposals had suggested cutting the deduction altogether or doubling it to $500. Educators reportedly spend $1.6 billion of their own money on school supplies each year — an amount that comes down to an average of about $485 per individual teacher.
Roger Riddell, Linda Jacobson / Education Dive
EDUCATION: HIGHER ED
IMPACT: Higher ed leaders are watching closely to see how impacts to itemized deductions will impact charitable giving, and many are concerned a number of changes would decrease state appropriations while increasing the tax burden for the industry’s largest institutions.
POSITION: Because of the broad differences in the sizes, budgets and missions of higher education, there are differing positions on the legislation. However, many of the largest and wealthiest institutions may see a greater impact to their bottom lines via endowment taxes and new taxes on the top-paid officials, and smaller institutions are keeping a close eye on how charitable giving changes will impact day-to-day operations.
ANALYSIS: Some of the biggest concerns in the tax bill for higher education leaders are the proposed endowment tax for private institutions; the changes to individual deductions, including changes to the way charitable giving can be itemized and the ability to deduct state and local income taxes; and the elimination of private activity bonds that can impact college and university foundations that are involved in real estate. The bill also proposes a 21% tax on the top-five paid individuals with salaries over $1 million at nonprofit organizations, which puts institutions on the hook for paying a tax on the salaries of the president and men’s basketball and football coaches.
The inability to deduct state and local income taxes still worries many higher ed administrators that there will be pressure on states and localities not to raise taxes, which means that though some individuals may see an increase in net earnings, there will be increasingly tough decisions about discretionary funding in state houses — and further cuts to higher ed at the state level.
And though individuals will still be able to deduct charitable gifts, the required threshold for itemization would mean an estimated loss of $12 billion to $20 billion per year for the industry starting in 2018. And the elimination of the 80% deduction for seat licenses at college sporting events may mean athletics departments lose a major incentive for potential program donors, as well, which could shift some of the athletics budget burden back to the institution.
While tuition waivers are saved from taxable income and the committee agreed to preserve the ability to deduct student loan interest, there are still a number of provisions that will impact institutions if this bill is passed.
Autumn Arnett / Education Dive
IMPACT: Lower corporate tax rates and new depreciation rules should free up capital for utilities to invest in infrastructure or refund to customers.
POSITION: Electric utility trade groups support the pending tax reform.
ANALYSIS: Tax reform is expected to benefit electric utilities in three separate ways, said Travis Kavulla, vice chairman of the Montana Public Service Commission.
A lower tax rate will “create headroom” in existing utility rate structures. Utilities currently set rates for customers factoring in a 35% corporate rate. Cutting that could create a “rare opportunity,” Kavulla said, “where rates could remain the same even while plowing more capital into infrastructure.”
The pending legislation would also allow companies to deduct 100% of the cost of a capital project from their taxes in the first year, rather than deducting smaller amounts over time. That would create a “front-loaded incentive,” Kavulla said, “to plow money into infrastructure early.”
Today, utility rates are set on the assumption that companies will pay a 35% tax rate, but various deductions allow utilities to pay less upfront, allowing utilities to realize “early-year cash benefits even if it means liability in later years.”
Under current law, those future liabilities would be based on a 35% corporate tax rate, but lowering that rate would mean utilities would have to pay less than they planned.
“Basically, Uncle Sam and customers have been fronting [utilities] extra cash for infrastructure in the early years,” Kavulla said. “That bill eventually becomes due, but because you’re changing the tax bill midstream what’s due to customers [in refunds or infrastructure spending] has actually increased.”
Critics of tax reform argue corporations are likely to return funds from tax reform to shareholders. While that “may be the case in the wider economy,” Kavulla said, “regulators, if they’re paying any attention at all, are not going to allow that.
“If commissions are not on top of that it could result in limited situations utilities just pocketing that money so regulators and consumer advocates are going to have to be pretty proactive,” he said.
Gavin Bade / Utility Dive
FOOD AND GROCERY
IMPACT: The tax bill is universally welcomed in the food and grocery industry. The lower tax rate would give companies more money to invest in their businesses or to acquire companies working on clean label, organic or other products consumers demand.
POSITION: Major grocers and food manufacturers support the tax reform bill, and believe the legislation will level the playing field for the industry and retail corporations.
ANALYSIS: The Grocery Manufacturers’ Association, a trade group representing more than 250 food, beverage and consumer product companies, said earlier this month that “tax reform will benefit consumers, workers and manufacturers.” The association urged Congress to move aggressively to finish the legislation and sign it into law.
Independent supermarket operators want to ensure the bill achieves rate parity between major players and pass-through entities, such as partnerships and S corporations. Under the current proposal, the corporate tax rate would be lowered to 21% while the pass-through level would be nearly identical at 20%. In an industry beset with razor-thin margins, tax cuts are particularly helpful for retailers, especially smaller, mom-and-pop establishments.
“Supermarkets are a high tax industry with the majority of independent grocers operating on just one to two percent net profit margins, meaning any reduction in the effective tax rate will significantly help these entrepreneurs hire additional staff, expand offerings, and upgrade their stores," the National Grocers Association said late last month.
The Food Marketing Institute has previously expressed support with the proposed tax changes. Jennifer Hatcher, the trade association’s chief policy officer, said in Novemberthat FMI wants to make sure the final legislation “lowers effective rates, treats all industries and business structures fairly, and helps promote job creation and economic growth.”
Emma Liem / Food Dive
IMPACT: Repeal of the Affordable Care Act’s individual mandate is likely to upset payer risk pools and ripple to other players, but hospitals averted elimination of their ability to use tax-exempt bonds.
POSITION: Hospitals and insurers overwhelmingly oppose repealing the individual mandate, but in general the industry stands to gain substantially from the bill’s cut to the corporate tax rate.
ANALYSIS: Repealing the individual mandate would result in about 14 million fewer people with coverage in 2026 and premium increases of about 20%, according to the Congressional Budget Office. Fewer people with health plans means fewer people seeking care services. Mandate repeal is likely to pull younger and healthier consumers out of the market, resulting in higher premiums and an increase in high-deductible health plans. The rate of insured could also be compromised if the changes to the tax code trigger automatic cuts to Medicare that could reach $25 billion a year under congressional budget rules.
One big win for industry: The final bill kept back the ability of hospitals to use so-called private activity bonds to finance infrastructure and other investments.
Healthcare companies will also be pleased the final product retained the deduction for certain medical expenses and also lowers the threshold from 10% to 7.5% for two years.
Republican leaders have said separate budget legislation will address destabilization of ACA exchange markets by funding CSRs and a reinsurance program. Analyses, however, have shown those measures aren’t enough to give the market a sound structure.
Shannon Muchmore / Healthcare Dive
IMPACT: A likely flurry of investments in short-term infrastructure upgrades could lay the foundation for the next big leap in digital disruption where powerful online access and sophisticated data-mining become so prevalent that customized, service-driven engagements are possible just about anywhere consumers are.
POSITION: The marketing industry has largely remained silent on the tax bill, in part because the impact won’t be clear until the final version receives approval.
ANALYSIS: The proposed corporate tax cut may be minimized for businesses like Google, Facebook, Amazon and Procter & Gamble — the world’s largest advertiser — as they’ve already taken steps that reduce their effective tax rate in the U.S.Despite this mitigating factor, the tech giants will still see savings as high as $2.28 billion for Google, $1.56 billion for Facebook and $723 million for Amazon, per Cowen senior research analyst John Blackledge. This windfall coupled with a provision that would allow any company to write off capital expenditures — costs that are currently written off over the course of several years — could result in a jump in investment in short-term infrastructure upgrades, as the provision expires after five years. In fact, Blackledge predicts that Google, Facebook and Amazon will spend a combined $234 billion in capital expenditures from 2018 to 2022 because of the expensing provisions in the bill, with Facebook having already announced plans to double its reinvestment next year.
The introduction of a territorial tax system, which the bill includes, means U.S.-based companies with overseas operations would no longer be required to pay U.S. corporate taxes on a portion of or possibly all foreign profits. As a result, some of the infrastructure investments could take place outside the U.S. as these companies look to bolster their international operations. Already, we’ve seen Facebook announce that it’s shifting how it records advertising revenue — by and far its biggest source of revenue — to a local selling structure. While positioned as a move to provide the kind of transparency local governments are demanding about how much revenue local ad sales generate, the move also appears to better position Facebook to increase overseas investments and take advantage of a territorial tax system.
Retailers and telecommunications companies are among those who could take a hit from the bill as many carry a significant amount of debt, and the bill is likely to cap the amount of deductible debt interest at 30% compared to the 100% now allowed. This could undermine an already-fragile brick-and-mortar retail sector.
Chantal Tode / Marketing Dive
IMPACT: Due to deep cuts for businesses and mild reductions for middle-class consumers, the tax bill would spur economic growth at a time when retailers could really use it.
POSITION: Passing tax reform, with the priority on lowering the corporate tax rate, has been the retail industry's biggest public policy push for years.
ANALYSIS: Passing tax reform, with the priority on lowering the corporate tax rate, has been the retail industry's biggest public policy push for years. Retail trade groups are eagerly heralding the GOP-led House and Senate bills a must-pass measure that, due to deep cuts for businesses and mild reductions for middle-class consumers, would spur economic growth at a time when retailers could really use it.
Despite the differences between the Senate and House bills, the National Retail Federation has been adamant in its stance that "there is far more that the two chambers agree on than they disagree on," from the perspective of retailers, which according to NRF CEO Matthew Shay pay among the highest effective tax rates (although onlookers argue that few pay as high as 35%, currently the effective corporate tax rate). The Retail Industry Leaders Association has also backed the recent GOP-led proposals, which notably exclude the controversial (and now dead) border adjustment tax which retailers fought against earlier this year. The trade association is pushing for "quick" passage of a plan it said will stimulate economic growth and fuel the creation of new jobs.
Retailers also say the tax plan will cut taxes on middle-income consumers, freeing up more money to spend at retail businesses. However, as Morgan Stanley noted in a December report, consumers are spending more on experiences than things, and there's no guarantee any tax savings would go toward retail purchases.
According to a Dec. 4 report from Wolfe Research, the biggest specialty apparel winner under the Senate's tax plan would be Gap, whose corporate tax rate would drop from 39.6% last year to 23.5% once the plan goes into place. Other big winners would include: Nordstrom, Restoration Hardware, Dick's Sporting Goods, Williams-Sonoma and Ulta, which are expected to see their rate drop from the high 30s to between 22.3%-24.2%. Overall, most retailers would be enthusiastic about Congress meeting President Donald Trump's Christmas deadline.
Corinne Ruff / Retail Dive
RENEWABLE ENERGY AND NUCLEAR POWER
IMPACT: Provisions of GOP tax legislation most damaging to renewable energy were left out of the final conference report, but tax credits critical to the nuclear sector were also excluded.
POSITION: Renewable energy interests are expected to continue opposing the GOP tax bill. They and nuclear companies will look to a potential tax extenders bill next year to grant credits to a variety of technologies.
ANALYSIS: Renewable energy interests were relieved that proposed cuts to electric vehicle and wind subsidies did not make it into the final tax legislation last week. But they expressed concern about the retention of a Base Erosion Anti-Abuse Tax (BEAT) provision that companies could prevent them from monetizing tax credits.
The Senate BEAT provision threatened to derail up to $12 billion in tax equity investments, but the final bill aims to avoid that by allowing companies to offset up to 80% of BEAT tax payments accrued due to energy tax credits.
The renewable energy industry supports the changes, but still harbors some concerns about the impact of BEAT.
"[W]e are uncertain how the marketplace will react to the fact that more multinational firms may now be covered by the BEAT, and tax credits may not all be useable in any given year," said Gregory Wetstone, president and CEO of the American Council on Renewable Energy (ACORE).
Under the current text, 80% offset provision for BEAT expires in 2025. That could stifle investment in wind generation, Wetstone added, as they receive tax credits for producing power for a decade after they are put into service.
Credits of nuclear generation and other “orphan” tax credits could be folded into a tax extenders package that Sen. Lisa Murkowski (R-AK) expects to follow the larger reform bill.
Gavin Bade / Utility Dive
IMPACT: A cut in the corporate tax rate could increase cash flow, allowing more investment in technology, business expansion and new jobs along the supply chain.
POSITION: Manufacturers and freight industries are for the bill, but ports and airlines have some reservations.
ANALYSIS: For business, the tax reform bill appears to deliver. Increased cash flow from a lower tax rate could prompt the different modes of freight and 3PLs to invest more in supply chain visibility tools, predictive analytics and blockchain alliances.
But if signed into law, the bill would also tax companies for making payments to foreign companies, which could hurt the global supply chain.
In that respect, the bill is a bit of a mixed bag. While the bill may spur expansion and job growth for big and small American businesses, the bill’s “America First” slant could pose serious difficulties for supply chain managers dealing with foreign suppliers, 3PLs or carriers.
The bill will disrupt supply chains, affecting the flow of supplies and products and potentially making it more expensive for American companies to do business and trade with foreigners. While it’s too soon to know whether the lower tax rate will compensate for that provision, supply chains are in for a shakeup in 2018.
Kate Patrick / Supply Chain Dive
IMPACT: Tech companies with large overseas cash holdings will benefit from cuts to corporate tax rates, but SMBs and companies with larger domestic holdings may not be as lucky.
POSITION: Big tech lobbied hard for a cut to the corporate tax rate, but the loss of R&D tax breaks and new income tax applications on grad students may undercut the win.
ANALYSIS: The corporate tax rate currently sits at 35%, but the tech sector on average pays much lower than that. For example, the average tax rate is about 16% for computer services companies and about 25% for internet software companies, according to Aswath Damodaran, professor at the Stern School of Business professor. Moving the overall rate down to 21% may not benefit tech as much as other sectors since the industry already has lower rates.
The lowered, one-time repatriation tax, however, will have a greater effect. Tech tops the list of U.S. companies with the largest overseas cash holdings. More than $564 billion is held abroad between Apple, Microsoft, Cisco, Alphabet and Oracle — $246 billion of which belongs to Apple alone.
The tax levied on overseas cash will drop from the current 35% corporate rate to 15.5% under tax reform. Less liquid assets will be taxed at 8%. For companies without large overseas cash holdings, the benefits are less substantial.
Alex Hickey / CIO Dive
IMPACT: Reduction in corporate and pass-through rates seen as a positive by companies of all sizes throughout the industry.
POSITION: The waste industry has been generally supportive throughout. This included lobbying by the National Waste & Recycling Association and Institute of Scrap Recycling Industries.
ANALYSIS: Industry executives have been eagerly anticipating tax reform in earnings calls, interviews and casual conversation all year. Multiple CEOs have projected major M&A activity will follow if any kind of corporate rate reduction is finalized, further accelerating the rapid pace of consolidation in the industry. For businesses not organized as corporations, particularly smaller family-run service providers or local recyclers, the pass-through rate reduction will be similarly welcomed.
Another key provision is the ability to fully expense all heavy equipment purchased until January 2023. With many material recovery facility owners considering upgrades to meet China's more demanding contamination standards this may be even more relevant heading into 2018.
Others areas of concern for the waste and recycling sector had included a change in deductions for research and development and the elimination of tax-exempt private activity bonds. The latter was seen as especially relevant for local governments that may rely on such bonds to fund new solid waste and recycling infrastructure. Many consider the state of U.S. waste infrastructure to be behind the curve and are hoping for more domestic expansion in light of China's evolving trade restrictions. In the bill's final version, companies will now have to write off research expenses over a longer period of time and the bonds have been preserved.
Cole Rosengren / Waste Dive