Tax Cut Impact: The Very, Very Early Returns

By | 2018-01-16T22:42:42+00:00 January 16th, 2018|

The tax cuts are reality. Political discourse about the tax cuts is a mess. Either the tax cuts will destroy the country and drive us all into poverty, or they will lift the economy to unseen heights and pay off the national debt. At CSR Matters, we think the truth lies somewhere in the middle of those extremes. More importantly, however, we are taking a different view of the subject. We want to know what is happening to Corporate Social Responsibility investments as a result of the tax cuts. What is the “tax cut impact”?

In this post, we have the very, very early returns.

Leading brands were ready to act

By “tax cut impact”, we are referring to companies taking a portion of their financial savings from the Trump tax cuts and putting that money to use via Corporate Social Responsibility investments. And there are lots of ways to do this. Companies make CSR investments every day … in their workforce (think wages, training, hiring), in environmental sustainability programs (think manufacturing efficiency, carbon footprint reduction, volunteer projects to clean up parks), in philanthropy (think matching programs, giving to signature charity partners), compliance (think audits, public disclosures, ethics training), and more.

On December 4, 2017, we published this blog post asking Corporate America to plan now for the tax cuts. Clearly CSR Matters was not the only firm talking with clients about the coming tax cuts. But we were not finding a public dialogue about the potential tax cut impact or the benefits to CSR programs, our communities, employees and neighbors in need who benefit from CSR investments. So we wrote about it. And we even encouraged CSR professionals to speak up and play a leadership role in the conversation.

The good news is that there was a lot of CSR activity happening behind the scenes. Leading brands were preparing to demonstrate exactly the sort of leadership we need in this industry.

Tax cuts announced

So on December 20, 2017, Congress passed a tax reform bill that included reductions in corporate tax rates (from 35% to 21%), a ceiling on tax rates for pass-through small businesses (20%) , and a low one-time tax on repatriation of corporate overseas earnings (15.5%).

If you want to dig into the politics, you can read the conservative spin or the liberal spin. What seems clear to us is that a lot of capital will be put to work by Corporate America. The tax bill impacts small, medium and large businesses alike.

Most importantly for CSR practitioners, as the tax reform bill was being passed, the CSR investment announcements began.

Tax cut impact: the early returns

The announcements came quickly, and the number of early announcements surprised a lot of people.

  1. AT&T was first, announcing a $1,000 bonus to its 200,000 non-management workforce, plus a $1 billion corporate infrastructure investment in 2018 alone.
  2. Fifth Third Bancorp announced raising their minimum wage for 3,000 hourly employees to $15, and one-time bonuses of $1,000 for 13,500+ employees.
  3. Wells Fargo Bank announced an 11% increase in its minimum wage to $15. In addition, Wells said it would increase its charitable giving budget by $115 million, or 40%, to $400 million.
  4. Boeing CEO Dennis Muilenburg praised the new tax bill and stated that Boeing would spend $300 million of additional CSR investments, to be split equally on employee training and education, facility upgrades, and charitable giving.
  5. Comcast announced one-time bonuses of $1,000 for 100,000+ employees, as well as a 5-year, $50 billion investment in plant, infrastructure, and media assets such as its them parks.
  6. Next, Bank of America, BB&T and PNC stated that they would raise their minimum wage to $15 per hour and hand out bonuses.
  7. And just last week, Walmart announced it had joined the list of leading brands investing in their people. In additional to increasing the starting wage for all hourly employees from $9 to $11, benefits are being expanded for maternity and parental leave, there is a new adoption benefit of $5,000, and $1,000 bonuses are being awarded to a large number of employees. Walmart estimates the value of its investment at $700 million in the first year.
Spending money vs CSR investment – what’s the dif?

While all of the tax cut impact announcements cited above are good for our economy and good news for workers, not all meet the standard for a CSR investment. In an effort to really highlight the difference and applaud the companies that are focused on CSR investments, we should separate corporate spending from CSR investing. For example, AT&T’s $1 billion investment in infrastructure is great for our economy, but it does not meet the test as a “CSR investment”.

CSR investments represent a longer term commitment to the health and welfare of our communities, workers, neighbors. Think “sustainability” broadly defined.

“Sustainability” means things like:

  • Workers remain skilled and competitive,
  • Environments stay clean and healthy for the next generation,
  • Resource consumption remains measured and responsible, and
  • Our neighbors in need receive the support to advance their lives in meaningful ways.

For example, lets look at employee compensation. Raising wages across the board, such as raising a minimum wage, is an act of corporate social responsibility. It reflects a long term commitment to better lives for a company’s workers. So does an expansion of benefits, such as Walmart announced. On the other hand, handing out bonuses is great – I’d like one! – but bonuses reflect profitability more than commitments to changing our world for the better. We do not know if workers receiving a bonus this year will be better off financially next year.

So when it comes to compensation, the applause meter spikes for Bank of America, BB&T, Fifth Third Bancorp, PNC, Walmart and Wells Fargo.

Training and education is an investment in our workers. It is an act of employee engagement that will benefit employees longer term by expanding their skills to stay competitive. And so it meets our standard as a CSR investment.

The employee engagement applause meter spikes for Boeing.

And what about the easiest CSR investment to identify – charitable giving? Wells Fargo and Boeing announced increases in their charitable giving budgets of $100 million or more apiece.

The charitable giving applause meter spikes for Wells and Boeing.

For fun, let’s crunch some numbers

One more way to evaluate the tax cut impact reports we are seeing is to ask a question: If companies are receiving a substantial tax savings, how much of that savings is the company investing back into the workers, corporate infrastructure, charitable giving, etc.? That is a fair question, right?

Again, these are the “very, very early returns”. So I’m going to use the example of Boeing and crunch a few numbers. Admittedly, this is a quick analysis. Financial experts could refine this further.

In 2016, Boeing paid $1.2 billion in federal income taxes on a pre-tax profit of $5.2 billion. While the corporate tax bracket of 35% would apply to most of Boeing’s earnings, the effective tax rate of 23% is the result of R&D, prior losses, tax deferrals and other tax adjustments that I don’t want to dig into for this example. Let’s focus on the $1.2 billion paid. Under the new tax bill, the highest corporate bracket drops from 35% to 21%. Boeing, for example, will benefit from a 40% reduction in that bracket. Again, keeping this exercise simple, let’s assume that Boeing will pay 40% less in federal income taxes this next year on the same pre-tax profit.

If Boeing pays 40% less in taxes, that is a savings to Boeing of $480 million. They have just announced a $300 million investment into the company, with a full two-thirds of that going to CSR investments – $100 million in new charitable giving, and another $100 million invested in employee training and education. In our high level analysis, roughly 42% of the tax savings is being directed to CSR investments, with total spending on the company and its stakeholders at 62%. Those are encouraging metrics.

Bringing it home

CSR investments improve our communities, strengthen our workforces, sustain our environments, and build brand capital with the public. Corporate leaders such as the companies cited in this post understand this.  And clearly these companies didn’t wait to see what the final tax bill looked like before acting – they were prepared to act, and act in big ways. Now, how many more companies will follow their lead?

We will continue to cover this topic. We are optimistic. Fortune-level companies are demonstrating leadership by virtue of their CSR investments. And we expect that thousands of small and mid-sized businesses will be inspired to act as well.

If your company would like help with your CSR strategy – to envision possibilities created by the tax cut impact – CSR Matters is ready to help.

Like we asked on December 4th – What will your company do with its tax cut?

 

About the Author:

A Principal at CSR Matters, Gary has 25+ years of experience working in Corporate Social Responsibility, including nonprofits, software development and the financial services industries. "It's a labor of love. I have a number of professional interests, and they all intersect with CSR." Over the past several years, he has been actively involved in the acquisition, growth and consolidation of a number of companies in the CSR space, including AmeriGives, Good Done Great, WPG Solutions, and Dexterity Ventures, plus donor advised funds DonateWell and Place2Give. Gary's prior experience includes leadership positions with Bank of America, United Way and KindMark. To learn more about the breadth and depth of Gary's operational, financial and executive experience, please visit https://www.linkedin.com/in/gpfcarr/.