Investigating Company Claims After the Tax Cut

by January 25, 2018

President Donald Trump celebrates the passage of the Tax Cuts Act with Vice President Mike Pence, Senate Majority Leader Mitch McConnell, and Speaker of the House Paul Ryan. (Official White House Photo by Joyce N. Bogosian)

Immediately after the tax cut passed in December, companies like Walmart, AT&T, Boeing, Comcast, and Wells Fargo began announcing how they would invest in employees and facilities.

Many of these claims are less significant than initially advertised and not necessarily tied into the tax cut. It’s a good time for business journalists to follow up on what portion of tax cut-funded profit increases are invested and how much becomes executive bonuses, shareholder dividends or stock buybacks. Here are some tips on what to look for.

Examine the history of corporate profits

Start with where corporations have stood historically. The former 35% corporate tax rate didn’t apply to most companies. The number was a top marginal rate. As I mentioned on Forbes.com last April, a General Accountability Office 2016 study found at least two-third of active corporations had zero federal income tax liability after applying tax credits. The average effective tax rate — the amount actually paid compared to income — for large corporations was 16.1%. Federal tax rules allowed companies to claim negative net income and bring the paper losses forward.

While average numbers don’t necessarily apply to specific companies, they suggest the need to examine at a company’s financial filings and determine its own historical effective tax rate.

Check the value of raises

As companies announce the raises they will pay or the size of coming investments, look at true values. I compared the $11-per-hour wage floor Walmart announced to historical hourly wages of non-supervisory employees from Bureau of Labor Statistics data, as compiled by the Federal Reserve Bank of St. Louis. The average wage in December 2017, the most recent numbers available at the time, was $22.30 an hour, showing an $11 figure to be lower than it might immediately sound.

Furthermore, Walmart announced in January 2016 that the floor wage would be raised from $9 an hour to $10. At that point, the average part-time wage was already $10.58, while the full-time wage was $13.38. The wage increases seem likely a continuation of an existing strategy. There was also the pressure of 18 states increasing their minimum wages starting January 1, 2018. With the raises, Walmart announced substantial layoffs and store closings that likely defrayed a significant part of the cost.

In addition, an Institute on Taxation and Economic Policy senior fellow told The New York Times that Walmart could likely save at least $2.2 billion a year from the tax cuts. Walmart had said that a one-time round of bonuses to some hourly employees would cost $400 million the first year. Ongoing raises would run $300, less offsetting cost reductions. But the company already planned a $20 billion stock buyback.

See if higher prices pay for spending

Like Walmart, Comcast announced bonuses and investment based on the tax cuts, including $50 billion over five years for infrastructure. However, the 2016 annual report showed the company had spent $9.1 billion in infrastructure investment, a 7.5 percent increase over the 2015 number. Given the growth rate, hitting the $10 billion a year should be easy.

One-time $1,000 bonuses for 100,000 employees would represent $19 a week per employee. The company had already announced across-the-board rate increases for millions of customers. With an extra $5 a month in service fees and $1 in modem rentals for 25 million broadband subscriptions, the revenue increase of $29 million a week far outstripped the weekly $1.9 million for bonuses. And at the end of the year, the bonus cost disappears while the rate increase stays. The funding mechanism already existed.