For the calendar year 2018, federal corporate tax revenues were about $91.4 billion lower than during calendar year 2017, a decline of about 32%. The federal corp. tax cuts that took effect in 2018 lowered the tax rate from 35% to 21% and are the primary reason that federal revenues were 0.4% lower in calendar year 2018 compared to 2017 (in a strong economy). All banks are required to file detailed financial reports to regulators on a quarterly basis. Examining that data provides an estimate of how banks were affected by the recent federal tax cuts. Comparing the average effective tax rate of banks between 2013 and 2016 (in 2017 banks paid an an anomalously high rate) to the rate in 2018 and applying the difference to the pretax income of banks provides an estimate of the savings banks received from the corp. tax cut. The table below shows that collectively, banks accounted for $31.7 billion or about 1/3rd of the total corp. tax cut savings, with the 9 largest banks saving almost $15 billion or 16% of the total corporate tax savings in 2018 – an average $1.64 billion per bank. I expect banks, and big banks in particular to have an issue with this estimate so I encourage them to point out errors in my simple methodology.
Posted tagged ‘tax cuts’
Big Banks Big Tax Savings
April 2, 2019Frequently in Error But Rarely in Doubt
January 2, 2019In my economic presentations I often say that I am ‘frequently in error but rarely in doubt.” Still, when in error I admit it, it’s a sign that I am willing to ask myself “why” in order to improve my methodologies. I was wrong when I predicted NH’s job growth would be under 1% in 2018 (it is double that), largely because the labor force was able to grow more than I had forecast (see my previous post on net in-migration to the state). In a letter to Congress over 100 economists asserted that “the macroeconomic feedback generated by the “Tax Cuts and Jobs Act” would be “more than enough to compensate for the static revenue loss,” implying that the bill would be deficit-neutral over time. Federal revenues have a seasonal (monthly) variation, with some months bringing in more revenue than the government spends and vice versa. Comparing similar months over time thus offers some insights into the deficit trends over time and in different economic conditions. As the chart below shows, the November 2018 monthly deficit (the most recent data available) show that during a period of solid economic growth the U.S. ran the highest November monthly deficit in its history.
Proponents of the bill also claimed that we would see enough additional investment to boost growth by 4% per year. That implies an increase in annual investment of roughly $800 billion. But, as this post noted, investment has not jumped to that level, nor does it show signs of doing so anytime soon. The economists who predicted that tax cuts would spur a rapid increase in investment and higher revenues have been proven wrong. They have also remained silent, which suggests that they are not at all surprised to see revenues and investment fall far short of what they promised. Many, if not most, will dismiss the rising deficit (see below) during times of solid economic growth as a function of rising spending.
Rising spending is, in fact, a major but not unexpected contributor to the deficit problem. Stagnant or declining revenues in a strong economy are not the norm, and are the kind of pro-cyclical fiscal policy (cutting taxes in a strong economy instead of filling coffers during a strong economy so that taxes can be cut to stimulate the economy when it is weak) that is going to make the next economic downturn much more difficult to combat.
It’s a Good Time to Be a Bank
October 15, 2018It’s a good time to be a bank, well a BIG bank anyway. Bank of America’s Q3 profits are up by 32%, JPMorgan/Chase’s by 24%, Wells Fargo by 32% in the 3rd quarter. Higher interest rates, a strong economy and needed (for smaller banks) regulatory relief have helped but the biggest contributor has been the reduction in the corporate tax rate. Industry-wide Q3 results have not yet been reported but looking at Q2 and Q1 2018 data compared to 2017 shows the impact of tax cuts. While banks pre-tax income was up by 12-13% in 2018, net income was up 27-28% because applicable income taxes (federal & state) were down more than 20%.
The banking industry has been perhaps the biggest beneficiary of the Trump administration’s initiatives. Earlier this year I examined over 400 press releases announcing how companies would be using the proceeds from corporate tax cuts and highlighting employee bonuses, minimum wage hikes, etc. (the releases were remarkable in their similarity as were the benefits accruing to employees – a small percentage but more about that in a future post). Despite banks being only about 1% of all business enterprises thy accounted for just over 30% of the press releases highlighting worker and civic benefits of the tax cut.
The Fed’s Revenue Loss is NH’s Revenue Gain
May 24, 2018Federal corporate tax revenues have been on a downward trend since 2016. That is unusual in a recovering and growing economy. The recently enacted corporate tax rate cut from 35 to 21 percent has accelerated the downward revenue trend, a result expected by everyone with a thought process more guided by empirical evidence than ideological orthodoxy. The figure below shows how much more sharply corporate tax revenue has been declining since the recent cut in the U.S. corporate tax rate. Each point on the graph’s line shows the sum of the prior 12 months of U.S. corporate tax collections. Thus, the large recent drop in the 12 month sum of corporate tax collections (as of April 2018) includes only a few months of the new lower rate, yet it still shows a precipitous decline in annualized revenue.
I would like to have seen more real “reform” along with a more gradual corporate rate cut (along with some spending reforms to limit impacts on federal deficits) but the U.S. and New Hampshire business tax rates were too high and needed to be cut. Still, no one who has even a cursory knowledge of the research and evidence on corporate tax cuts expected that such a large rate cut from 35% to 21% would actually increase corporate tax collections. The best that can be said about the impacts of a large corporate tax cut is that it will lose less revenue over time. That doesn’t mean that a tax cut will always result in an absolute decline in revenues, although that has clearly been the case with the recent U.S. tax cut. Revenue can still increase with a small rate cut even though revenues may be lower than they would have been had rates not been cut . That is the case with New Hampshire’s very modest, recent cuts in business tax rates. Business tax revenues (for the most part) continued to increase in NH but at a slower rate of growth after the cuts where enacted.
New Hampshire is expected to have a more than $100 million budget surplus by the end of fiscal year 2018. New Hampshire risks drawing two inaccurate conclusions from this surplus and the recent sharp increase in business tax collections that is largely responsible for it. First, that the small drop in 2017 in the state’s business profits tax (BPT) rate from 8.5% to 8.2%, and business enterprise tax (BET) from 0.75% to 0.72%, is responsible for the recent large increase in NH business tax revenues and subsequent state surplus. Second, that a larger rate cut would produce even more business tax revenue and perhaps an even larger budget surplus. Again, the rate cuts were needed but NH should understand that the rate cuts have not, and will not in the future, lead to a surge in business tax revenue. If NH’s business tax cuts had actually produced more revenue (than if rates had not been cut) the growth rate of business tax revenue would have increased following the rate cuts. In fact, the growth rate in business tax collections declined after NH’s rate cut took effect for tax periods beginning after December of 2016. That is until the federal government lowered its corporate tax rate. Again, it’s not that business tax collections actually declined, the U.S. and NH economy were strong and profits were increasing, it’s just that NH, by marginally lowering tax rates, decided to capture a little less of those profits and thus the growth rate of business tax revenue declined.
The figure above shows that the annualized growth rate in NH’s business tax revenues declined throughout much of 2017 (although the final months showed some modest reversal of the trend). Annualized revenue growth jumped dramatically, however, in the first four quarter of 2018, after the cut in the federal corporate tax rate. The chart also shows that the growth rate of NH’s seven largest sources of general revenue – other than the BPT and BET – that are dependent upon economic conditions and economic activity in the state (meals and rentals, liquor commission revenues, tobacco, real estate transfer, communications services, interest and dividends, and insurance taxes) are growing much more modestly, below the trend from recent years, and certainly not enough to produce a $100 million plus budget surplus.
Clearly business tax collections are responsible for NH’s large budget surplus, but it is not accurate to say that the increase in business tax collections reflects a “booming NH economy” as many in the state argue. NH’s economy is strong but not exactly “booming” (1.3% year-over-year job growth ranking 21st nationally, and 1.9% GSP growth ranking 26th) and not nearly strong enough to produce the kind of business tax revenue growth that the state has seen in recent months. Excuse this brief sidetrack (it is a pet peeve) but don’t assess growth in NH’s (or any state’s) economy on the basis of a state’s unemployment rate. Hawaii, at 2.1%, currently has the lowest unemployment rate in the nation followed by NH and North Dakota tied at 2.6% – but here is the thing, over the past year the North Dakota economy has lost 1.3% of jobs (the worst growth rate in the nation), while NH added 1.3% more jobs (21st among all states).
The same is true when state unemployment rates and the annual growth in state gross state product (the broadest measure of economic growth) are plotted (chart below). In 2017 NH tied with Michigan for 25th among states for growth in gross state product (at 1.9%), despite NH having a 2.6% unemployment rate while Michigan’s rate is 4.7%. The scatter plots above and below urge caution in using unemployment rates to gauge economic growth in a state, especially now that slow labor force growth is contributing to low unemployment rates and acting as a binding constraint on economic growth in many states.
Growth in NH’s business tax revenue has historically tracked private sector employment growth in the state. To show just how unusual the recent growth in NH’s business tax revenue is in relation to job growth in the state look at the following chart which shows how far, by historical measures, the recent growth in revenues has outpaced NH’s private sector employment growth.
Private sector job growth has picked up in recent months (defying reported growth in the size of NH’s labor force – and suggesting to me that NH may be (re)capturing some of the state’s labor that has been working outside of NH – but more about that in a future post). However, growth in business tax revenue has far exceeded that which historically accompanied similar rates of job growth. Changes to federal corporate tax laws are a primary reason for the out-sized boost in NH’s business tax revenues, so whatever you think of the recent federal tax reform you can thank the feds for their role in creating NH’s current budget surplus. The NH Department of Revenue provided lawmakers with a briefing on what tax reform could mean to NH’s revenues but they were rightly cautious in making a dollar forecast of impacts. But a summary of their analysis of impacts suggests that more of the provisions of federal tax law will increase rather than decrease NH revenues.
The impact on NH revenues of federal corporate tax collections is also apparent when comparing annualized growth in federal corporate and NH business tax revenue in recent years. The chart below shows how dramatically different are the most recent trends in business tax revenue growth at the federal and NH state level. In addition, surprisingly (to me at least), this inverse relationship seems to occur over the longer-term as slower growth in federal corporate tax collections since the recession are associated with higher growth in NH state business tax collections (and vice versa), despite the fact that economic growth in NH lagged U.S. growth during much of the recovery from recession.
I have argued in prior posts that lawmakers should be cautious in budgeting because revenue growth in NH, although growing, was growing more slowly. I did not foresee a $100 million budget surplus but who did, and who knew what the impact of federal tax reform would be. No public hearings or discussion of the federal tax reform proposal were held and in any case nobody was certain whether changes in corporate tax laws would pass. Growth trends in most of NH’s key sources of state revenue have been modest even as federal tax reform quickly and dramatically altered NH’s business tax revenue trends, greatly improving the state’s fiscal position in the process. I believe that fundamental underlying revenue trends still argue for caution in state budgeting, but when the federal government’s actions contribute to a state surplus NH is happy to say “yes please and thank you.” Lawmakers would be wise , however, not to assume that cuts in the state’s business taxes are responsible for the growth in state tax revenues or that larger cuts will add to the surplus.
What Will the “Fiscal Cliff” Mean for NH?
October 30, 2012For an economy struggling to gain altitude it is hard to see how the impending spending cuts and tax increases associated with the “fiscal cliff” will do anything in the short-term but bring the economy to stall speed or push it back into recession. At a time when compromise is seen as weakness and ideological impurity, an agreement must be reached in order to avoid the negative effects of the the fiscal cliff. Depending on what is included, the ‘fiscal cliff includes anywhere from $500 to $700 billion in combined spending cuts and tax increases (many via the expiration of temporary cuts).
All states will feel the effects of the elimination of the temporary cut in the payroll tax but states with a higher percentage of high-income taxpayers will likely be affected more by the expiration of Bush era tax cuts. Despite often being characterized as a “tax haven” for the rich, NH is much more a “haven for the middle class” as it has a somewhat higher percentage of high-income households than the U.S. (but much lower than MA) and a relatively smaller percentage of lower- income individuals. The percentage of high-wealth individuals in NH is above the U.S. average, but the percentage of income taxes paid by those making $200,000 or more in NH is lower than 24 other states.
States where higher-wealth individuals pay a larger portion of the state’s tax burden are likely to be relatively more affected by the tax cut expiration provisions of the fiscal cliff. But NH will still see an estimated increase in payroll taxes of about $650 million, a significant drop in disposable income in the state. In addition, a study by George Mason University’s Center for Regional Analysis estimates that the defense department and non-defense department budget cuts that will result from the fiscal cliff will cost NH about 6,300 jobs and $325 million in labor income. NH no doubt will take some solace from the fact that Massachusetts is likely to see nearly 10 times the job losses from budget cuts to defense and other purposes (especially medical) and as a result of their high percentage of high-wealth households.
I want to think a reasonable resolution will be found that avoids the worst of the potential problems from the fiscal cliff. Fiscal tightening is clearly warranted, and it appears almost certain that at a minimum the payroll tax holiday will be allowed to expire as well as the Bush era tax cuts for upper income households. It is also almost certain that long term unemployment insurance benefits will be allowed to run out. After that, it all depends on one four-letter word – compromise.
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