Trump Tax Plan Sets Up Trade-Offs for Industries

By Theo Francis and Richard Rubin Features Dow Jones Newswires

Now that the Trump administration has made its broad-brush tax proposal, companies are likely to line up in support -- and start sweating the details.

Continue Reading Below

For many companies, and especially large ones, those details may prove far more important than the headline proposal to cut the top business-income tax rate to 15% from 35%.

And their priorities may well conflict. Big tech firms, drugmakers and multinational manufacturers, among others, like a measure slashing taxes on foreign profits by imposing a "territorial" tax system. Wal-Mart Stores Inc. and other retailers, among those that stand to gain the most from the rate cut, are eager to head off a congressional border-adjustment proposal to tax imports -- an idea on which the Trump plan is silent. Oil-and-gas companies hope to preserve rules speeding up deductions for drilling expenses. Pipeline companies and utilities fear losing valuable interest deductions.

The stakes are high and some measures are almost universally popular among big companies -- even if the priority order may differ from firm to firm.

Bank of America Merrill Lynch estimated earlier in the year that S&P 500 companies would see their per-share earnings increase 12% in 2018, all else equal, if the U.S. moved to a territorial tax system of no longer taxing foreign profits and also lowered the statutory tax rate to 20%, 5 percentage points higher than the administration's proposal.

On its own, the broad outline put forward on Wednesday is unlikely to ruffle many corporate feathers, says Robert Willens, a New York City tax consultant. "Everyone would benefit," Mr. Willens said. "Some a little more than others, but not enough to warrant a battle between companies or industries."

Continue Reading Below

That could well change, however, as the White House and congressional Republicans seek to hammer out the details, and in particular determine how tax cuts will be paid for. Passing a tax bill without Democratic support would require that the bill avoid increasing budget deficits beyond what is typically a 10-year window. That means tough trade-offs, making tax-rule changes temporary, or both.

And some key elements of the administration's business-tax plan remain unclear. House Republicans have proposed ending deductions for business-interest payments, and would let firms write off capital expenses immediately, instead of over time as is generally now the case.

Mr. Trump's proposal doesn't directly address either point. Treasury Secretary Steven Mnuchin said the administration favors some form of immediate write-off but didn't commit to any details. He also recognized that real-estate and utility companies, among others, are worried about losing the interest deduction.

"We want to make sure that we don't do anything that creates uncertainty in the economy," Mr. Mnuchin said.

Big industrial firms are among the companies rooting for Mr. Trump's proposal to implement a territorial tax system, in which the U.S. only taxes profits generated in the country, leaving overseas profits untouched except by those countries. Currently, the U.S. is unusual in taxing firms' overseas profits if the proceeds are brought to the U.S., a system that has encouraged U.S. companies to book profits in low-tax foreign jurisdictions and leave them there. (Companies typically must pay the difference between what they already paid in foreign tax jurisdictions and the full U.S. tax bill for the repatriated profits.)

About one in five companies in the Russell 1000 index generate a majority of their sales outside the U.S., and more than half receive at least some revenue from abroad, according to Bespoke Investment Group data. U.S. firms hold about $2.6 trillion overseas, the nonpartisan congressional Joint Committee on Taxation estimates.

"You pay the tax in the jurisdiction that you actually earn it," said Jeffrey Bornstein, finance chief of General Electric Co., which has made the case for the approach. "Then from there, those earnings are fungible and can move cross-border."

U.S. taxes on foreign earnings encourage multinationals "to manage cash in a very odd way," David Ricks, CEO of drug maker Eli Lilly & Co., said. "A lot of companies park cash offshore and borrow domestically."

Stryker Corp, a Kalamazoo, Mich.-based maker of replacement hips and surgical instruments, holds about 84% of its $3.32 billion in cash and equivalents overseas, according to the company's annual report. Other medical-industry companies have executed "inversions" -- effectively moving overseas in an effort to reduce U.S. taxation on future profits.

"If they move to a territorial system, then we don't have to worry about trapped cash or inversions," Stryker CEO Kevin Lobo said late last year.

For oil-and-gas producers, a key concern is the fate of tax breaks, some more than 100 years old, that allow U.S. well operators to treat certain drilling costs as an expense in the year they are incurred, rather than capitalizing and depreciating them over time.

Small businesses are likely to rally around the headline rate cut, especially because as proposed, it would also apply to the business income individuals receive through partnerships and other pass-through entities. The vast majority of small firms use pass-through structures.

Small-business owners would also benefit from the proposed repeal of the estate tax, which they "spend a lot of money and time making plans for dealing with," said Barbara Weltman, an attorney and author of J.K. Lasser's Small Business Taxes.

Other companies may put their most vigorous efforts into blocking potentially harmful proposals. Many retailers and consumer-product companies, including Wal-Mart Stores Inc. and Nike Inc., have waged an aggressive campaign to head off Republican proposals for a so-called border-adjustment to the corporate income tax. That idea -- denying deductions for imports and exempting exports from U.S. taxes -- would raise the price shoppers pay for everyday goods from clothes to bananas, retailers say.

Mr. Trump's plan is silent on this question and Mr. Mnuchin says he has concerns with it. House Republicans are working on revisions to the border-adjustment proposal to soften its impact and smooth the transition to the new system.

Retailers have been joined in their opposition by several refiners that buy foreign oil, which could become more expensive under such a proposal.

In a Tuesday conference call with investors and analysts, Texas-based gasoline maker Valero Energy Corp. said the push has turned a lot of legislators off to the idea. "We think the likelihood of [the border adjustment] being in the tax reform has declined substantially," Senior Vice President Jason Fraser predicted.

Even within a given industry, priorities can differ markedly.

Ford Motor Co. is a big exporter of vehicles and builds nearly 80% of the cars it sells in the U.S. at U.S. plants. It has said a border-adjusted tax could help the company's bottom line.

But competitors General Motors Co. and Fiat Chrysler Automobiles N.V. import more vehicles sold in the U.S. than Ford does, and could be hurt.

--Chester Dawson, Ben Eisen, Joseph Walker, Ruth Simon, Bradley Olson, Thomas Gryta, Christopher M. Matthews, Sarah Nassauer, Peter Loftus and Yoree Koh contributed to this article.

(END) Dow Jones Newswires

April 26, 2017 20:09 ET (00:09 GMT)