INDIANA — Corporations in the United States will end up with billions more dollars this year than they did last year.
The reason? The Trump Administration’s federal corporate tax cut, a provision of last year’s Tax Cuts and Jobs Act, which reduces the percentage large companies have to pay on their profits to 21 percent from 35 percent — finally putting the United States on par with the rest of the world
This year, corporations across the country and Indiana all are asking the same question: Now what? How should they spend the extra cash they’ve been seeking for years?
Every Indiana corporation that Kevin Brinegar, the Indiana Chamber of Commerce’s president, has talked to has had an answer, although their ideas have varied.
Corporations seem to have several options laid out in front of them: They could pass along the extra money to employees; invest in new projects; or deal with their additional earnings in quieter ways, by giving money to shareholders, paring down their debt or acquiring/merging with another company.
Indiana corporations have chosen all these routes.
Brinegar believes that it’s up to each company and what’s best for them, but all options will lead to some type of economic growth for the country and the state.
That could be true, although some economists see different outcomes.
The advertised effect of the tax cut is $4,000 more for the average American family.
As of March 27, one-third of America’s 500 biggest companies had announced how they were going to take advantage of the tax cut, according to the Bank of America Merrill Lynch. Forty-five of the S&P 500 businesses said they would hand out cash bonuses to employees.
Moody's Investors Services, a credit rating business, predicts that most companies will favor more subtle avenues of investment, including share buybacks, mergers and acquisitions and the relieving of their debt.
Buybacks, which benefit shareholders, are already up 8 percent this year, and J.P Morgan is predicting that companies will buy back up to $273 billion more of their stocks this year than they did last year.
Of the companies planning to invest in workers, some are contributing a one-time sum to their employees instead of making permanent changes. If companies do invest in growth, though, they may boost employee earnings in the long term, said Steve Pressman, a visiting professor of economics at Colorado State University, in an email. Pressman has been critical of the tax cut’s effect on American workers in the past.
STRATEGY FOR GROWTH
The three largest public companies in Indiana all have released at least some details for the money that they’ll save from the tax cut, and all of their strategies differ.
Anthem, an Indianapolis health care company, said in a February earnings call to investors that it plans to give half its money back to shareholders, but the rest will be used to invest in the corporation’s employees, services and customers. Among its investments, Anthem specifically mentioned technology modernization, consumer-facing digital technologies and product development capabilities. More than 58,000 current and former Anthem employees will be receiving $1,000 more for their 401K plans.
Eli Lilly and Co., meanwhile, said in a recent earnings call of its own that the company would be paying off $2 billion of its debt and buying back “some level” of its shares as a result of the tax cut, which reduces the company’s effective tax rate to 18 percent from 21.5 percent.
Cummins, a Columbus engine manufacturer, is still evaluating its options, but wants to invest in its facilities, research and technology, said Jon Mills, the corporation’s director of external communications. Specifics on the projects, however, weren’t immediately available.
Another Hoosier company, NiSource Inc., a utility provider with headquarters in Merrillville, announced this week that it would be reducing its customers' electric bills by $30 per year and its natural gas bills by $10 per year. NiSource’s parent company, NIPSCO, applauded the tax cut in December, promising that it would result in customer savings.
Indiana corporations aren’t the only ones investing, though. National companies with Indiana connections also plan to spend their tax cuts in a way that will benefit working Hoosiers.
UPS, which employs 9,800 people in Indiana, has $12 billion in investments planned for the company, including the construction and renovation of facilities, the purchase of new aircrafts and ground fleet vehicles and the enhancement of information technology platforms that support UPS’ network and help manage its business. The company is also pumping $5 billion into three U.S. pension plans sponsored by UPS, which will translate to about $13,000 per plan participant.
Several national companies intend to permanently increase minimum wages for their Indiana employees, including Wells Fargo and Fifth Third Bank, both of which are upping theirs to $15 an hour. Walmart is increasing its minimum wage to $11 an hour. Other corporations are giving out one-time bonuses to workers, such as Comcast, which will be contributing $1,000 to over 100,000 of its employees.
Still more corporations with Indiana influence are promising large capital investments: Fed Ex has attributed plans to invest $1.5 billion in its Indianapolis shipping hub to tax reform, and AT&T will be investing $1 billion into its capital expenditure budgets (in addition to providing $1,000 in bonuses to some of its employees).
It’s no surprise that corporations’ reactions to the tax cut are so varied. Justin Wolfers, a professor of economics and public policy at the University of Michigan, wrote in a New York Times column that some American companies aren’t sure what to do with their recent cash fall. They don’t have great investment ideas, and, therefore, they’ve decided to return the money to their shareholders.
Some corporations, like Cummins, are still considering what to do with the tax cut as they wait for the Internal Revenue Service to adopt regulations to address the country’s new tax laws, said Brinegar with the Indiana Chamber of Commerce.
“Those rules have to be promulgated and then pored over to see exactly what they mean and how to interpret this or that provision of the new tax law,” he said.
Cummins is also worried that restricted trade might undo some of the progress that tax reform has made, Mills said. If things continue going well, though, the company wants to devote its tax cut toward pursuing growth because it will help them cement long-term success.
“When we’re more successful long term, then we’re able to add jobs and strengthen our communities,” he said.
Cummins would never have seriously considered letting just one of its stakeholders (customers, employees and shareholders) benefit from the reform, either.
“We’re always looking at ways to, you know, strengthen them all or provide benefits to all of them rather than just looking at one as a singular myopic focus,” he said.
But while Cummins is spreading out its use of its extra tax dollars, other companies’ commitment to catering to investors doesn’t mean the economy won’t benefit from the tax plan. If shareholders decide to finance more investments by the companies they own, the economy will grow, according to Wolfers.
Brinegar has counterpoints for all of the investor-centric ideas that corporations have for the tax cut. Share buybacks put more control back into the hands of the company, which he says is generally better for employees. Mergers and acquisitions also mean stronger, bigger companies, and paying off debt means that companies have more money to do other things, he said.
Plus, a lower corporate tax rate means that Indiana businesses will be more competitive with global companies, which enjoyed lower tax rates in other countries than they did in the United States before this year.
Wolfers does warn, though, that the tax cut could still be a bust. That would happen if corporations' ideas don't result in investment.