U.S. industries can start counting their benefits from tax law

Craft breweries are raising a glass to the Republicans' new tax overhaul: It cuts the excise tax on beer. Retailers, long saddled with heavy tax bills, will get relief. So will some high-profile names in corporate finance, led by Wells Fargo.

The tax measure that President Donald Trump signed into law Friday distributes benefits across a range of American industries, from construction to health care.

"As a general rule of thumb, everybody's doing well under this bill," Martin Sullivan, chief economist at Tax Analysts, says of U.S. companies. "When you give out a trillion in tax breaks, it's hard to create a lot of losers."

No wonder the stock market has been roaring in anticipation of fatter after-tax corporate profits. The new law slashes the corporate tax rate to 21 percent from 35 percent. It applies a low one-time tax to the profits that corporations have long kept overseas to avoid paying taxes under the current higher rate.

It also delivers a windfall to people who pay personal taxes on business earnings. It lets companies immediately write off the full cost of new equipment. And it showers goodies on some individual industries, such as craft brewers, distilleries and wineries.

The reasoning behind shrinking the tax burdens of corporations is to free up money for companies to invest in buildings, equipment and people and thereby juice the economy, and, in turn, benefit workers. Yet mainstream economists have expressed mainly doubts that workers will benefit much from corporations' lower tax burdens.

In dollars, the biggest tax savings from 2018 through 2027 go to manufacturers: $261.5 billion, according to an analysis by the University of Pennsylvania's Penn Wharton Budget Model. Next-most-fortunate are insurance and finance companies ($249.4 billion) and retailers ($171.4 billion).

Supporters of the Republican tax bill point out that America's 35 percent corporate tax is one of the highest among advanced economies. But the tax code is so riddled with loopholes that few corporations have actually paid that list price. Without the new law, the effective tax rate across all industries would have been 21.2 percent next year. With it, the effective rate across industries drops all the way to 9.2 percent in 2018, according to the Penn Wharton Model.

Not all industries have gained equally from loopholes. Retailers, for example, would have paid a 27.5 percent rate in 2018; under the new law, they'll pay just 15.6 percent.

"The tax bill is a big shot in the arm for retailers, who have traditionally paid taxes at nearly the full amount," says Matthew Shay, CEO of the National

Retail federation

Shay says he thinks the bill will help retailers accelerate investment in e-commerce and mobile technology. He also predicts that the bill will induce foreign-owned retailers to shift investment dollars into the United States.

Finance and insurance companies would have paid an effective corporate tax rate of 26.1 percent next year. Now, it will be 14.3 percent. Analysts at Goldman Sachs have estimated that the tax law will boost big-bank earnings per share by 13 percent next year. The top beneficiary will be Wells Fargo, which has been dogged by scandals over cheating customers. It will enjoy an 18 percent earnings surge in 2018, Goldman estimates.

Technology companies like Apple and Google's parent Alphabet Inc. can now catch a break on profits they've stored abroad. Under current law, corporations must pay the U.S. corporate tax on overseas earnings, but not until they return the money.

So tech companies have kept a big chunk of profits overseas—$669 billion worth at the end of last year, according to Moody's Investors Service.

The tax overhaul imposes a discounted one-time levy on those earnings—15.5 percent for earnings held in cash or other liquid assets and 8 percent for earnings held in harder-to-sell assets. That means tech companies can return the money the United States with less of a tax burden. But their employees may not have cause to rejoice: CFRA analyst Scott Kessler predicts that tech companies will use most of the money they repatriate to buy back their stock and pay shareholder dividends.

The tax bill let craft brewers cross something off their longstanding wish list: The federal excise tax they pay will be halved to $3.50 a barrel on the first 60,000 barrels. Wineries and distillers also get tax breaks.

At COOP. Ale Works in Oklahoma City, founder Daniel Mercer forecasts a tax windfall of about $60,000 next year. The 8-year-old brewery, which has quadrupled its staff to 31 in the past 2½ years and whose annual revenue has reached $5 million, was already planning to invest $2 million in equipment. The tax savings will contribute to that project and also "helps with building tap rooms, and tap rooms are a really high-margin source of revenue," Mercer says.

The tax plan also benefits owners of "pass-through" businesses, who pay personal income tax on business earnings: It lets them deduct 20 percent of the first $315,000 in earnings. The pass-through provision will help Esther Novis, who owns the Young Scientists Club, a company in Jamestown, Rhode Island, that sells science kits and other toys that encourage children to dabble in science.

"Margins in the toy industry are very small," Novis says. "If there's more money left over because we pay less taxes, we can be a little more competitive" and invest in new products.

Like many Americans, Peter Koehl of Skullduggery Inc., a toy maker in Anaheim, California, isn't yet familiar with the details of the tax changes.

"As with most government actions, we hope for the best and brace for the worst," Koehl says. "I can confidently tell you that a significant percentage of any 'windfall' will be invested in things that either increase sales or efficiencies."