New tax law has business world mixed

Carl Guardino is CEO of the Silicon Valley Leadership Group, a business association with members from array of industry sectors including high tech, biotech, renewable energy, financial services, venture capitalism and more. After years of advocating for corporate tax reform, Guardino said the changes to individual rates made the GOP bill a tough pill to swallow.

“When the details around individual [rates] started coming out, this became a mixed bag rather than the Christmas gift that we had all fought for,” Guardino said. “It turns out there’s a lump of coal in that otherwise Christmas stocking of gifts. And that’s hard to reconcile in an innovation economy where your most valuable asset is by far your employees.”

The GOP overhaul has been touted as a boon to companies that will see corporate tax rates slashed from 35 percent to 21 percent. It also alleviates the tax burden on profits made overseas by moving the United States toward a territorial system. Instead of companies paying additional U.S. taxes when they bring home profits made in foreign countries, corporations will be subject to the rates based on where the cash was earned.

With nearly half of the SVLG’s 370 members having fewer than 100 employees, Guardino said he’s heard business leaders celebrate as well as lament the potential ramifications of the tax overhaul.

“Across the board from an American competitiveness standpoint, there is so much to like on the corporate side of this bill to keep us competitive, which keeps our workers employed,” Guardino said. “The big however, after 15 years of fighting for corporate tax reform, is they decided to lump in individual tax reform as well as. Across many of our companies is a deep concern of how this negatively impacts their employees and families, especially those employees who live in high-cost states like California.”

Guardino said the overhaul that kicked off in 2018 is akin to the 1960s western classic “The Good, the Bad and the Ugly.”  

Positives include the sharp reduction in corporate income tax rates to 21 percent, which is higher than the GOP’s initially proposed 20 percent, but closer to global competitors from the 35 member countries in the Organisation for Economic Co-operation and Development, Guardino explained.

The corporate tax reform will “strengthen America’s innovation economy around the globe,” Guardino said, adding the new rates are “much more in line with all of our OECD competitors across countries that average 22 percent.”

Another benefit is the tax bill’s overhaul of what’s charged to companies making profits overseas, Guardino said. Prior to the new law, most companies headquartered in America would pay U.S. taxes when they brought home cash from abroad, on top of the rate paid to the jurisdiction in which it was earned. Now, companies won’t be double taxed by the federal government when they transfer earnings home.

“It goes to a territorial system, so our companies are not at the disadvantage of being double taxed when other countries don’t do that to their home-located companies competing globally. And it allows a higher rate than expected, but a rate that’s still compelling to bring cash that is stashed overseas back home,” Guardino said.

In general, keeping U.S. companies globally sustainable has widespread benefits, he argued.

“Anyone who says that policies that help our companies stay competitive is somehow bad for the American worker has forgotten that workers are employed by employers,” Guardino said. 

Still, in Silicon Valley where the economy orbits around innovation and companies are drawn to the region’s pool of talent, what affects employees can affect employers. That’s where the bad and the ugly come in, Guardino said.

The tax bill provided more modest cuts to individual rates, but placed caps on deductions that could prove costly for middle-class residents in states like California. One change is that homeowners will only be able to deduct the interest paid on mortgage debt up to $750,000.

That cap could make it even harder for people to buy in a region where seven-digit home prices are common and a jobs-to-housing imbalance is fanning an affordability crisis.

Rosanne Foust, CEO of the San Mateo County Economic Development Association, said she’s also heard mixed reactions from corporate representatives.

“While SAMECDA and our member companies are still evaluating the final version of the tax plan, the legislation will have positive and negative impacts on San Mateo County’s business community,” Foust said in an email. “Reductions in the corporate tax rate will benefit companies in California and companies like AT&T, Wells Fargo and Comcast have announced employee bonus plans and wage increases. But the new limits on deductions for mortgage interest, state income tax and property taxes will have a challenging impact on an already difficult housing market and employees who want to purchase a home.”

Under the GOP’s tax law, starting in 2018 individuals are capped on how much in state and local taxes they can deduct from their federal returns. In high-tax states like California, that $10,000 cap that also includes property taxes could put the squeeze on middle-income families.

Rufus Jeffris, spokesman with the Bay Area Council, said while the business organization was supportive of the changes to corporate taxes, many are worried about its other effects.

Concerns include the potential for the bill to “exacerbate our housing crisis and possibly hurt foundational elements of our innovation economy,” Jeffris wrote in an email, before noting further evaluation of the final bill is needed.

Despite a near doubling of the standard deduction for individuals, caps on other deductions could have the net effect of increasing tax obligations for some families. Guardino noted that could ultimately be felt by small businesses that benefit from consumers having more disposable income to shop at local establishments.

The ugly of the bill, he said, is that it ends up disenfranchising those in places with higher local tax rates like California, New Jersey and New York, which also happen to be blue states. Despite having advocated for corporate tax reform for more than a decade, the changes to individual rates have tempered the excitement of many local business representatives, he said.

“It tastes like medicine when it first goes in, … but there’s a pretty bitter aftertaste when it comes to what we value most in an innovation economy, which is our workers and our families,” Guardino said, noting companies are concerned about their ability to retain employees. “This is going to be a seriously difficult conversation in Silicon Valley board rooms and living rooms for the foreseeable future.”

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