Tax Reform Unleashed: What It Means for Industrial Corporations
Historically, the U.S. has been recognized as a leading destination for businesses looking to succeed. International and domestic companies alike have benefited from America’s stable political climate, abundant natural resources, skilled labor force and trusted U.S. currency. The U.S. tax code, however, had been a challenging area when compared to other countries.
Fortunately, the landscape has changed with Congress passing and President Trump signing the Tax Cuts and Jobs Act. Some key provisions of this bill include:
- Federal corporate income tax rate of 21 percent, effective January 1, 2018
- Reduced income tax rate on pass-through business entities’ qualifying business income
- No corporate alternative minimum tax
- Territorial tax system
- Full expensing of new and used equipment for five years
- Encouraging repatriation of cash held outside the U.S. through a 15.5 percent tax rate
Until now, the highest marginal federal corporate tax rate in the U.S. was 35 percent, which often surpassed 40 percent once state taxes were taken into account. The tax rate of countries like Germany is less than half of that, putting U.S.-centric companies at a distinct disadvantage when competing in the global market. The new law levels the playing field with the much lower 21 percent rate for C corporations, while also closing many tax loopholes and emphasizing corporate responsibility.
For pass-through entities such as S corporations, LLCs and partnerships, the Tax Cuts and Jobs Act establishes a 20 percent exclusion of qualified business income, subject to certain caps, from an individual’s taxable income, providing a reduction of up to 10 percentage points in the highest effective rate in many cases.
Like all legislation, the new tax law is not perfect. However, it is clear that comprehensive tax reform is good for skills, wages and jobs, all of which feed into a strong economy. The recommendation from the National Association of Manufacturers (NAM) for the government to conduct a study every three years to examine how the U.S. tax code compares to other countries is an excellent idea as opposed to waiting another 30 years to revisit it.
In 2015, Clemens Food Group broke ground on a 650,000 s.f. fresh pork processing facility in Coldwater, Michigan, in response to growing demand for its products. Upon becoming operational in 2017, the highly automated, state-of-the-art facility has been able to double its fresh pork business. Doug Clemens, president and CEO of Clemens Food Group, points out that the company would have invested another $30 million two years ago to put in a second production line, if immediate expensing had been an option. “As a 122-year-old privately held company, capital expenditures are extremely important to us,” he said. “We need to have as quick a return as possible.” For Clemens Food Group, Gray Construction’s fresh pork processing customer, this would have created at least 25 percent more workers. From Gray’s perspective, construction workers would have increased by 15 percent. Moving forward, the new tax law has created the opportunity and incentive for Gray to hire more team members, specifically engineers.
Business Response to Tax Reform
Since the law was enacted, many companies, including manufacturers, have responded in responsible ways. For example, Boeing announced a $300 million investment into its workers, including $100 million going toward workforce development. FedEx, who has been vocal in its support of tax reform, has also promised to invest in its workforce through hiring. Fiat Chrysler Automobiles (FCA U.S. LLC) said it will move production of RAM Heavy Duty trucks from Mexico to Michigan. This is part of a $1 billion investment that will result in 2,500 jobs. The company also said it would pay $2,000 bonuses to 60,000 employees.
“These announcements reflect our ongoing commitment to our U.S. manufacturing footprint and the dedicated employees who have contributed to FCA's success,” said Sergio Marchionne, the CEO of FCA, in a media release. “It is only proper that our employees share in the savings generated by tax reform and that we openly acknowledge the resulting improvement in the U.S. business environment by investing in our industrial footprint accordingly.”
More recently, Apple announced that it would repatriate billions in cash leading to a total investment of $350 billion in the U.S. economy over the next 5 years, including the creation of some 20,000 jobs. Campbell Soup has also said it will invest in its brands and pay down its debt.
If executed effectively, this tax reform has the potential to drastically increase economic activity. It serves as a catalyst for further advancement in business growth.
As business owners, we have three choices with these tax savings:
- Distribute to the shareholders.
- Hold the savings in cash in the business.
- Create new jobs and invest in new equipment and/or projects.
The greatest benefit to the country will be to push the savings into new jobs, equipment and projects, as we’ve seen many companies already doing. At Gray, we believe many of the changes represented in the new tax reform plan will prove to be building blocks for substantial growth in our industrial economy for years to come.
Read more about this perspective in "Tax Reform through the Eyes of a Design-Build CEO" via Area Development magazine.