5 minute read 10 May 2019
Workers Walking Through a Factory

How the Tax Cuts and Jobs Act effects business revenue

Authors

James Mackie

EY Americas National co-director, EY Quantitative Economics and Statistics (QUEST)

Economist. Mentor. Father. Husband.

Dr. Brandon Pizzola

EY US Quantitative Economics and Statistics (QUEST) Senior Manager

Economist with a strong background in economic and econometric modeling. His analyses of public policy issues have been published in academic journals and the media.

Robert Carroll

EY US National Tax Quantitative Economics and Statistics Group (QUEST) Co-Director

Assists clients on tax policy issues. Focused on revenue and economic impacts of policy changes.

5 minute read 10 May 2019
Related topics Tax

The Tax Cuts and Jobs Act (TCJA) made significant changes to the US tax code, and its effects are far-reaching.

This analysis focuses on the effects of the TCJA on the tax liability of businesses, presenting the estimated effects by both sector (C corporations versus pass-through businesses1) and major industry.

Key TCJA provisions and their effects on business tax liability

The TCJA is estimated to reduce the business sector’s tax liability by significantly changing both business tax rates and the business tax base. The reduction in tax rates — defined here to include the 21% corporate income tax rate, the effect of individual rate reduction on pass-through income, the repeal of the corporate alternative minimum tax (AMT) and the effect of the modification of the individual AMT on pass-through income — is estimated to reduce the business sector’s tax liability by approximately $1.7 trillion over the 10-year budget window.2 As shown in Table 1, most of the benefit from rate reduction is estimated to go toward the corporate sector (nearly $1.4 trillion of the $1.7 trillion).

Key business sector provisions tcja estimated rev impact

The TCJA changes the business tax base in a multitude of ways, some of which reduce revenue and some of which raise revenue. Considering all of these together, this analysis finds that business tax base changes, on net, raise about $787 billion (i.e., $698 billion plus $89 billion). Thus, almost half of the benefit of the law’s lower tax rates for businesses is offset by changes in the business tax base.

The revenue effects of the TCJA’s business tax base changes are concentrated in just a few major provisions. Almost half, or $793 billion, of the $1.7 trillion in base broadening comes from three provisions:

  1. The one-time transition tax on unrepatriated foreign earnings ($339 billion)
  2. The net interest expense limitation ($253 billion)
  3. The modification of the net operating loss (NOL) deduction ($201 billion)

Approximately four-fifths, or $725 billion, of the revenue losses stemming from base-reducing business provisions come from three provisions:

  1. The deduction of qualified business income and certain dividends ($415 billion)
  2. The move to a territorial (dividend exemption) system ($224 billion)
  3. 100% expensing ($86 billion)

Outside of the 11 largest changes in the business tax base, the TCJA includes an additional $239 billion in higher taxes from smaller base broadeners and $150 billion in lower taxes from smaller reductions in the business tax base.3

Taken together, the net impact of the changes to business tax rates ($1.7 trillion decrease in tax liability) and changes to the business tax base ($787 billion increase in tax liability) result in an approximately $950 billion decrease in business sector tax liability.

The TCJA’s revenue impact on specific industries

This analysis estimates the TCJA’s revenue effects to vary significantly by industry. When the business sector is disaggregated into six broad industries, tax liability is estimated to decline for each group over the 10-year budget window. These broad industries, which together comprise the entire business sector, are:

  1. Agriculture, mining and construction
  2. Manufacturing
  3. Wholesale and retail trade
  4. Transportation, information and utilities
  5. Finance, insurance, real estate, rental and leasing
  6. Services
Revenue impact tcja tax liability six key industries

Wholesale and retail trade

The TCJA has very different effects on the wholesale and retail trade industry. Trade receives a more sizeable, $283 billion (23%), net tax reduction from the TCJA. Trade’s relatively large net tax cut occurs because for that industry, the estimated $283 billion decrease in tax liability from rate reduction and AMT modification/repeal is offset by no net increase from changes to the business tax base.

On net, base changes have no effect on trade, which is in marked contrast to manufacturing. Trade’s net base change reflects, in turn, the combined influence of a base-broadening effect of $150 billion almost exactly offset by a tax decrease of $150 billion from proposals that narrow the tax base.

Looking further into the relative importance of the major base changes for trade, there are further large differences compared to manufacturing. The one-time tax on unrepatriated earnings has little effect on the trade industry, nor does the restriction on the deductibility of interest expense. Instead, for trade, the largest single base-increasing proposal is the BEAT. And, also in contrast to manufacturing, for trade, close to one-half of the decrease in tax liability from changes in the tax base is from the deduction of qualified business income ($63 billion), a provision which had only a relatively minor effect on manufacturing.

1 The categorization of taxes used in this analysis differs somewhat from that used in the JCT’s revenue table, because this analysis separates JCT’s aggregate estimates for business provisions into their respective impact on corporations and individual owners of pass-through businesses and includes as business taxes some pass-through taxes that JCT classifies as individual taxes.

2 For individual rate reduction and the modification of the individual AMT, only a portion of the total reduction in tax liability is attributable to a reduction in taxes on pass-through income. These provisions also, for example, reduce tax liability on wages and salaries, which are not part of the business sector. Accordingly, this analysis includes only the reduction in tax liability attributable to the pass-through income of individual owners of pass-through businesses. This portion was estimated through use of the Ernst & Young LLP Individual Microsimulation Model.

3 The 11 largest provisions include all business provisions that change revenue by at least $75 billion.

Summary

Businesses need to understand – through financial modeling – how tax reform will impact their organization and industry. In addition to examining their own specific situations, businesses should also assess the effect of tax reform on their customers, competitors, suppliers and employees.

About this article

Authors

James Mackie

EY Americas National co-director, EY Quantitative Economics and Statistics (QUEST)

Economist. Mentor. Father. Husband.

Dr. Brandon Pizzola

EY US Quantitative Economics and Statistics (QUEST) Senior Manager

Economist with a strong background in economic and econometric modeling. His analyses of public policy issues have been published in academic journals and the media.

Robert Carroll

EY US National Tax Quantitative Economics and Statistics Group (QUEST) Co-Director

Assists clients on tax policy issues. Focused on revenue and economic impacts of policy changes.

Related topics Tax