Taxing Decisions

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The headlines have passed. The shock is long over. But now, almost a half year later, the impact from US Public Law 115-117—only slightly better known as the “Tax Cuts and Jobs Act”—is still sinking in at corporate suites and boardrooms. And so is the hand wringing on what steps to take.

Lowering the corporate tax rate from 35 to 21 percent has garnered the most attention by far—and has sparked an on-again-off-again rally on Wall Street. And for good reason: In total, the tens of billions saved this year alone is virtually unprecedented. Or put one way, an organization with revenue of $4 billion to $5 billion will save $40 million to $60 million a year now. By year end, according to one estimate, half of the earnings per share that S&P 500 companies may enjoy could come from the tax savings.

How organizations actually use the savings won’t be known for years, partly because they aren’t yet sure themselves. Mark this as the rare occasion when the government moved faster than the private sector anticipated. In the process, one C-suite after another is now realizing the need to do some fundamental rethinking of near-term business plans. The speed of tax reform “caught a lot of companies a bit flat-footed,” says Reuven S. Avi-Yonah, director of the University of Michigan Law School’s international tax program and a specialist in corporate taxation. And yet, are they acting? According to a Korn Ferry survey two months into the year, fewer than 40 percent of leadership teams had met to discuss any high-level plans for the savings.

“Boards have been debating what to do for the last six months, and probably will be doing so for the next six months as well,” says Irv Becker, vice chairman of Korn Ferry’s Executive Pay and Governance practice. In addition to share buybacks, other actions being considered include: a one-time dividend, acquisitions, digital initiatives, employee training and development, and increased compensation/rewards for employees, among others. A Morgan Stanley report earlier this year projected that 43 percent of the tax savings will go toward share buybacks, versus 13 percent for workers.

But many experts say that’s a wrongheaded approach—that companies have a truly rare opportunity to deal with the one topic that has nagged them on and off for decades: talent. The list here is endless… Not enough talent. Wrongly skilled talent. Perpetually unhappy talent. Indeed, is there a CEO over the years who hasn’t brought up the critical value of hiring and retention? And these issues are only more challenging this year, with conditions (such as low unemployment and glaring attention on pay inequality) favoring talent.

In response, some are grappling with how to raise base salary rates to a higher level. Comerica, Walmart, Wells Fargo and others have already announced plans to raise minimum wages. But the biggest step may have little to do with cash—and a lot to do with that old mantra, “Location, location, location.” As millions discovered this April, the new law heavily penalized workers living in a handful of Northeast states and California. The result: More than 70 percent of C-suite executives polled by Korn Ferry said that tax reform would result in talent leaving organizations in high-tax states. On a personal level, 58 percent of those executives said they would consider looking for a job in a low-tax state—with 44 percent saying they would ask for a transfer.

All of which means that firms with more liberal work policies—or those not on the nation’s east or west coasts—may be attractive. Outfits like Amazon that are looking to build a second headquarters or satellite office, or those in locations that would historically be deemed undesirable, have a whole new equation to consider. “Companies have already been focusing on moving employees and facilities to low-cost geographies,” says Becker. “Tax reform will accelerate the desirability of some of these markets.”

To be sure, conventional wisdom says that organizations shouldn’t make business decisions based on tax policy. But the reform passed is anything but conventional, and coming as it does in the midst of perhaps the greatest disruption to business and labor ever, organizations may have little choice but to leverage Law 115-97 to their, and their workers’, advantage.

A NEW WORLD

21%: new US corporate tax rate

$40-60 million: average savings to large firms

13%: percentage of savings planned for workers

44%: percentage of executives who will ask for transfer