The 30-plus-year drought since the last tax code overhaul may be finally over as Congress sets out to vote on and place a now-finalized tax bill on President Donald Trump's desk.
The bill slashes the corporate tax rate from 35% to 21%, and also includes massive changes to how income earned or kept offshore is treated.
In other words, this week could be monumental for business accounts nationwide. Every industry could see effects — including those that make up smart cities. Here's a cheat sheet of what the bill could change, and where industry associations stand on it.
IMPACT: Overall, tax reform proposes various threats to city governments, primarily in the areas of infrastructure, key tax credits and the development of economically sustainable communities.
POSITION: Most city leaders, including those of the U.S. Conference of Mayors and the National League of Cities (NLC), opposed primary versions of the bill — and are still wary in light of the conference report.
ANALYSIS: The final conference bill is seen as one that "protects the tax exemptions for most bonds, preserves many key credits and partially protects the deduction for state and local taxes (SALT)," according to a statement from NLC President Mark Stodola. However the bill could still eliminate a few key resources for cities, which could in turn cause cities to fall short of economic and development goals.
One key elimination is the tax exemption of advance refunding bonds, which are defined as "any bond used to pay principal, interest, or redemption price on a prior bond issue (the refunded bond) ...A current refunding occurs when the refunded bond is redeemed within 90 days of issuance of the refunding bonds. Conversely, a bond is classified as an advance refunding if it is issued more than 90 days before the redemption of the refunded bond." Cities currently use these bonds to refund existing debt in response to economic downturns.
Another elimination is of a 10% credit for non-certified buildings built before 1936, which falls under the Historic Tax Credit (HTC).
While the preservation of the tax exemption for Private Activity Bonds (PABs) and of sales and local tax (SALT) deductions in the conference report are a semi-win for cities, Stodola is calling on Congress to reject any bill that further reduces these "important tools for cities."
THE BIGGER PICTURE
Here's how the bill may industries within the world of smart cities.
IMPACT: The public construction sector will benefit from the uninterrupted flow of private-activity bond financing, and both the contractors who are structured as pass-through entities and C Corporations will see significant tax relief.
POSITION: The retention of tax-free status for PABs, as well as favorable treatment of energy-related exploration and tax credits have some segments of the industry breathing a sigh of relief, but potential PAB use limits and the locking out of design professionals from being able to take advantage of the new, lower pass-through tax rate could result in some pushback.
ANALYSIS: The House GOP tax bill, passed early in November, took aim at PABs – a financing scheme that allows private entities developing public projects to borrow at the same tax-free rate as government agencies do – and eliminated them altogether. The Senate's version restored PABs, possibly driven by the expectation that they will play a big role in financing the president's $1 trillion infrastructure plan, but both chambers call for a termination of another popular finding vehicle, tax-exempt stadium bonds. Some states and municipalities rely on tax-free bonds for their contributions to the new construction and renovation of sports venues – often a condition of being able to snag a professional team – but, according to the Brookings Institution, the federal government loses out to the tunes of billions when projects that are financed this way.
The latest version of the reconciled bill also sets a new 21% tax rate for corporations, a break for everyone except those low-earners that currently pay 15%. But many construction companies are pass-through entities, a structure that allows owners to include business profits on their personal tax returns. The new tax reform measure gives those individuals a 20% break on that income, a bigger break that the House bill's rate of 25%. However, some in the industry were frustrated by a provision that professional service and consulting firms like architects and engineers to take that deduction.
The energy sector got better news when it was revealed that the Senate bill would reinstate the wind sector's production tax credit that the House bill eliminated. While the industry awaits the final version of the joint bill, word is that that credit, as well as one for the purchase of electric vehicles, will stay put. The measure also green-lights exploration in Alaska's Arctic National Wildlife Refuge.
Kim Slowey / Construction Dive
IMPACT: Lower corporate tax rates and new depreciation rules should free up capital for utilities to invest in infrastructure or refund to customers.
POSITION: Electric utility trade groups support the pending tax legislation.
ANALYSIS: The GOP tax legislation is expected to benefit electric utilities in three separate ways, said Travis Kavulla, vice chairman of the Montana Public Service Commission.
A lower tax rate will “create headroom” in existing utility rate structures. Utilities currently set rates for customers factoring in a 35% corporate rate. Cutting that could create a “rare opportunity,” Kavulla said, “where rates could remain the same even while plowing more capital into infrastructure.”
The pending legislation would also allow companies to deduct 100% of the cost of a capital project from their taxes in the first year, rather than deducting smaller amounts over time. That would create a “front-loaded incentive,” Kavulla said, “to plow money into infrastructure early.”
Today, utility rates are set on the assumption that companies will pay a 35% tax rate, but various deductions allow utilities to pay less upfront, allowing utilities to realize “early-year cash benefits even if it means liability in later years.”
Under current law, those future liabilities would be based on a 35% corporate tax rate, but lowering that rate would mean utilities would have to pay less than they planned.
“Basically, Uncle Sam and customers have been fronting [utilities] extra cash for infrastructure in the early years,” Kavulla said. “That bill eventually becomes due, but because you’re changing the tax bill midstream what’s due to customers [in refunds or infrastructure spending] has actually increased.”
Critics of tax reform argue corporations are likely to return funds from tax reform to shareholders. While that “may be the case in the wider economy,” Kavulla said, “regulators, if they’re paying any attention at all, are not going to allow that.
“If commissions are not on top of that it could result in limited situations utilities just pocketing that money so regulators and consumer advocates are going to have to be pretty proactive,” he said.
Gavin Bade / Utility Dive
RENEWABLE ENERGY AND NUCLEAR POWER
IMPACT: Provisions of GOP tax legislation most damaging to renewable energy were left out of the final conference report, but tax credits critical to the nuclear sector were also excluded.
POSITION: Renewable energy interests are expected to continue opposing the GOP tax bill. They and nuclear companies will look to a potential tax extenders bill next year to grant credits to a variety of technologies.
ANALYSIS: Renewable energy interests were relieved that proposed cuts to electric vehicle and wind subsidies did not make it into the final tax legislation last week. But they expressed concern about the retention of a Base Erosion Anti-Abuse Tax (BEAT) provision that companies could prevent them from monetizing tax credits.
The Senate BEAT provision threatened to derail up to $12 billion in tax equity investments, but the final bill aims to avoid that by allowing companies to offset up to 80% of BEAT tax payments accrued due to energy tax credits.
The renewable energy industry supports the changes, but still harbors some concerns about the impact of BEAT.
"[W]e are uncertain how the marketplace will react to the fact that more multinational firms may now be covered by the BEAT, and tax credits may not all be useable in any given year," said Gregory Wetstone, president and CEO of the American Council on Renewable Energy (ACORE).
Under the current text, 80% offset provision for BEAT expires in 2025. That could stifle investment in wind generation, Wetstone added, as they receive tax credits for producing power for a decade after they are put into service.
Credits of nuclear generation and other “orphan” tax credits could be folded into a tax extenders package that Sen. Lisa Murkowski (R-AK) expects to follow the larger reform bill.
Gavin Bade / Utility Dive
IMPACT: Tech companies with large overseas cash holdings will benefit from cuts to corporate tax rates, but SMBs and companies with larger domestic holdings may not be as lucky.
POSITION: Big tech lobbied hard for a cut to the corporate tax rate, but the loss of R&D tax breaks and new income tax applications on grad students may undercut the win.
ANALYSIS: The corporate tax rate currently sits at 35%, but the tech sector on average pays much lower than that. For example, the average tax rate is about 16% for computer services companies and about 25% for internet software companies, according to Aswath Damodaran, professor at the Stern School of Business professor. Moving the overall rate down to 21% may not benefit tech as much as other sectors since the industry already has lower rates.
The lowered, one-time repatriation tax, however, will have a greater effect. Tech tops the list of U.S. companies with the largest overseas cash holdings. More than $564 billion is held abroad between Apple, Microsoft, Cisco, Alphabet and Oracle — $246 billion of which belongs to Apple alone.
The tax levied on overseas cash will drop from the current 35% corporate rate to 15.5% under tax reform. Less liquid assets will be taxed at 8%. For companies without large overseas cash holdings, the benefits are less substantial.
Alex Hickey / CIO Dive
IMPACT: Reduction in corporate and pass-through rates seen as a positive by companies of all sizes throughout the industry.
POSITION: The waste industry has been generally supportive throughout. This included lobbying by the National Waste & Recycling Association and Institute of Scrap Recycling Industries.
ANALYSIS: Industry executives have been eagerly anticipating tax reform in earnings calls, interviews and casual conversation all year. Multiple CEOs have projected major M&A activity will follow if any kind of corporate rate reduction is finalized, further accelerating the rapid pace of consolidation in the industry. For businesses not organized as corporations, particularly smaller family-run service providers or local recyclers, the pass-through rate reduction will be similarly welcomed.
Another key provision is the ability to fully expense all heavy equipment purchased until January 2023. With many material recovery facility owners considering upgrades to meet China's more demanding contamination standards this may be even more relevant heading into 2018.
Others areas of concern for the waste and recycling sector had included a change in deductions for research and development and the elimination of tax-exempt private activity bonds. The latter was seen as especially relevant for local governments that may rely on such bonds to fund new solid waste and recycling infrastructure. Many consider the state of U.S. waste infrastructure to be behind the curve and are hoping for more domestic expansion in light of China's evolving trade restrictions. In the bill's final version, companies will now have to write off research expenses over a longer period of time and the bonds have been preserved.
Cole Rosengren / Waste Dive