Republican Tax Cuts Would Lift Some Industries More Than Others
Posted December 18, 2017 7:27 p.m. EST
WASHINGTON — The $1.5 trillion tax bill heading for a vote this week is a big win for corporations overall. But not every business benefits equally, with bigger cuts flowing to financial firms and the real estate industry than to manufacturers or mining companies, a new economic analysis finds.
The disparities illustrate the difficulty in tailoring tax cuts for two of the blue-collar industries that Trump frequently promises to invigorate through economic policy changes. That’s in part because both mining and manufacturing companies already benefit from relatively low effective tax rates among U.S. companies.
They also show how the tax plan is likely to shower benefits on the industry Trump built his fortune in — and on the Wall Street firms he railed against and has promised would not benefit from the bill.
The findings come from economists at the Penn Wharton Budget Model at the University of Pennsylvania, who projected how the final tax bill would change the average effective tax rates of a variety of industries over time.
The legislation is expected to be put to a vote in the House as early as Tuesday and in the Senate on Wednesday. It would reduce the corporate tax rate to 21 percent, from the current top rate of 35 percent, and make a host of other changes to the way businesses are taxed.
Other analysts, particularly Wall Street firms, have begun estimating how specific industries would fare under the tax plan in the years ahead. On Monday, Goldman Sachs researchers said they expect the corporate cut in the tax bill to increase earnings-per-share by 13 percent on average for America’s largest banks, with Wells Fargo standing to gain the most from the change.
The Penn Wharton economists found that it would reduce the average effective tax rate across industries to 9 percent next year, down from 21 percent under current law.
The cuts would boost some industries far more than others, in part because some sectors, like financial firms, pay higher effective tax rates than others, like manufacturing. Average effective rates are the tax rates that industries actually pay on profits after accounting for deductions and other tax breaks, as opposed to the statutory rate, which is set under law.
The study found that real estate firms would see a 16-point reduction in their effective rates next year, and financial firms would see a 12-point reduction. Mining companies would see a cut of just under 9 points. Manufacturers’ rate would fall by less than 7 points.
“Some industries see smaller gains because they already benefit from so much preferential tax treatment,” said Alexander Arnon, a researcher with the Penn Wharton Budget Model. “Manufacturing and natural resource extraction already have low effective tax rates under current law, and so there isn’t much room for them to fall further.”
The analysis projects that the bill will save financial firms $250 billion on corporate taxes over the next decade, a 35 percent cut from what otherwise would have been a $715 billion tax liability.
It projects manufacturers will save nearly the same amount, $261 billion. But that amounts to only a 22 percent cut, because that industry is larger than finance, and would have otherwise faced a $1.2 trillion liability over that time.
Financial firms start with a higher effective rate, and in the first few years would see a larger rate cut. In later years, though, manufacturers in particular fall prey to a pair of provisions phased in by Republicans.
One is the ability to immediately deduct the full cost of some capital investments, like heavy equipment and factories, which expires after five years. The other is a provision that effectively reduces the annual value of a tax credit for investments in research and development, which manufacturers utilize heavily.
Manufacturing lobbyists say they are bullish on the tax bill and plan to fight Congress in later years to ensure neither of those provisions take effect down the road.
Nearly 95 percent of respondents in a recent National Association of Manufacturers survey of its members said they were optimistic about their company’s outlook, a record for the 20-year-old survey. More than three-fifths said approval of the tax bill would likely cause them to increase capital spending.
“Our members are very happy about the tax bill as it’s written,” said Chad Moutray, the association’s chief economist. “You wouldn’t see that level of optimism if they didn’t think this was something that’s going to benefit them.”
Manufacturers currently enjoy one of the lowest effective tax rates of any industry, and they would continue to if the bill becomes law. Penn Wharton projects that manufacturers’ effective rate would drop from 17.5 percent to 10.9 percent in 2018. But that number would rebound to 15.8 percent in 2027 if the law remains as written.
No other major industry would see its rate savings shrink so drastically. But, under the legislation, every industry would see its gains erode over time. The average effective tax rate across industries, the Penn Wharton researchers calculated, would fall by 12 percent in 2018 compared to current law.
By 2027, that cut would shrink to less than 5 percent.