Tax Reform Gives U.S. Companies A New Economic Jigsaw To Build
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Overview

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was signed into law, sparking a series of sweeping changes to America’s tax system. With corporate income tax dropping from 35 percent to 21 percent, and an elimination of the alternative minimum tax for corporations, the American business sector is looking at the largest windfall in several decades.

More than 120 companies — including American Airlines, Apple, AT&T, Bank of America, Best Buy, CVS, Pfizer and Starbucks — have already announced cash payouts to employees ranging from one-time bonuses to wage increases. Other companies such as Discover and Boeing have announced they’ll make charitable donations with their savings, and 13 utilities say they plan to lower customer rates. Apple, Starbucks and Verizon announced stock grants. These changes are just the beginning. With a treasure chest of new cash, companies are now faced with the question of how — or whether — they should strategically steer their savings in a way that rewards shareholders and employees while also supporting long-term goals.

 


In Depth

“The tax reform bill provides some great opportunities for companies to rebalance and optimize how they allocate their investments in business and people,” says Roselyn Feinsod, Senior Partner, Retirement & Investment, Aon.

As organizations consider how to reallocate revenue and profits, among the top questions they face are:

  • What are the implications of tax reform on my company?
  • What have our competitors announced?
  • What are my employees’ expectations?
  • What is our timing and approach to making decisions?

Companies that have not yet decided how to allocate savings are also eyeing a mix of options. In a January 2018 Aon Pulse survey of more than 500 employers, a quarter of companies said they plan to spend on capital structure. Another quarter stated they would spend on infrastructure and 23 percent noted direct returns to shareholders as potential future plans.

Directing tax savings toward employee compensation and benefits was the top choice however, with 29 percent of the vote.

Most employers are still digesting how and when to allocate these dollars toward employee rewards. 60 percent hadn’t decided a timeframe for announcing how they would use their tax savings but most are considering:

  • Increases to base pay
  • Greater 401(k) contributions
  • One-time cash payments
  • Enhanced employee training
  • Increases to bonus targets

Other options being considered by many employers include lowering health care premiums and funding pension plans.

“Tax reform is giving employers another opportunity to reassess their pension strategies, including potentially advancing funding to their defined benefit pension plans in order to reduce overall risk,” says Alan Parikh, Associate Partner, Retirement & Investment, Aon.

In addition to employers’ initial views, employees themselves also have opinions on how their organization should allocate these dollars. A separate Aon Pulse survey of more than 2,000 employees found that 65 percent would like to see their employer spend the windfall on increases to annual pay, and another 22 percent on one-time cash payments.

Jane Kwon, Associate Partner, Talent, Aon, adds: “It’s not surprising that we see the overwhelming majority of employees looking for a little extra money in their wallets that they can save for unexpected expenses or use to pay down debt. As the war for talent continues to heat up, employers that invest at least some portion of the tax reform windfall in their workforce can go a long way in improving employee engagement and goodwill.”

Still, a higher tide of costs might lie ahead for some businesses. The act signed in December caps the deductibility of some interest payments, making debt more expensive for some corporations that must now weigh the benefits of pension debt versus hard debt.

As they weigh options for the tax windfall, companies must also consider external forces such as the shifting labor market, potential changes in U.S. health care policy, and future stock market trends. With an array of factors to consider, U.S. companies might be drawing new economic blueprints for many months to come.

 


Talking Points

“Many participants judged that the proposed changes in business taxes, if enacted, would likely provide a modest boost to capital spending, although the magnitude of the effects was uncertain” — Minutes of the U.S. Federal Reserve board meeting, December 12-13, 2017

“When the U.S. has a tax reform like this, you know, I wouldn’t say seismic, but it is a huge change for the world, and it’s a huge change for the world because U.S. corporations are big investors all around the world” — Mihir A. Desai, Mizuho, Financial Group Professor of Finance, Harvard Business School

 


Further Reading

What’s In The GOP’s Final Tax Plan – CNN Money, December 22, 2017

Where Did Your Pay Raise Go? It May Have Become A Bonus – New York Times, February 10, 2018

Defining Your Strategy Following The Tax Cut & Jobs Act  – Aon Webinar, February 6, 2018

Will “The Tax Cuts And Jobs Act” Have Unintended Consequences?Aon Retirement & Investment Insights, January 16, 2018