Big banks, which pay higher effective tax rates than many other companies, would be among the largest beneficiaries of tax reform and save billions of dollars if measures proposed this week take effect.
Republican leadership in Congress and the White House this week released a nine-page framework for tax reform, including a cut in the corporate tax rate to 20% from 35%, a simplification of income tax brackets and a larger personal deduction, among other provisions. How the tax plan treats other deductions and tax credits will be crucial in determining the full impact.
A group of five banks, consisting of Wells Fargo & Co., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and U.S. Bancorp, would have saved nearly $11.5 billion in 2016 with an effective tax rate of 20%.
By way of comparison, Apple Inc. reported nearly twice as much pretax income as Wells Fargo last year, a whopping $61.4 billion to the bank's $32.1 billion. However, Wells Fargo's effective tax rate was 31%, significantly higher than Apple's rate of 26%. Assuming a 20% corporate tax rate, Wells Fargo's net income would have increased by $3.7 billion, a boost of 17%, compared to an expected earnings boost of 6% for the typical S&P 500 company, according to Howard Silverblatt, senior industry analyst for S&P Dow Jones Indices.
A spokesman for Wells Fargo declined to comment.
This analysis has some limitations. Calculations are based on total income taxes paid, which include effects from deductions as well as state and local taxes. Corporations uniformly report total taxes on earnings releases but generally do not break out state and local taxes. Some companies, including Wells Fargo, offer a breakdown in annual filings. In 2016, Wells Fargo's federal income taxes totaled $8.2 billion, meaning a 20% corporate tax rate would translate to a benefit of nearly $1.8 billion. Further complicating estimates are reports that tax reform might include the elimination of deductions for state and local taxes.
At the very least, the findings underscore how U.S. banks pay some of the highest effective tax rates. By sector, telecommunications companies paid the highest effective tax rate at 34%. But with just four S&P 500 companies in the telecommunications industry, financial companies would receive the larger increase to earnings on a dollar basis. By sub-industry classification — as determined by the Global Industry Classification Standard developed by Standard & Poor's — "diversified banks" report by far the largest monetary benefit from a tax cut. That group includes Wells Fargo, BofA, Citi, JPMorgan and U.S. Bancorp. The five banks paid effective tax rates of between 26.7% and 31.4% in 2016.
Apple would have received a benefit of $3.4 billion with a 20% corporate tax rate, the second-largest number among S&P 500 companies. The tech giant's earnings boost would be roughly 7.5%. Two other companies would also receive a benefit of at least $3 billion: tobacco producer Altria Group Inc. and telecommunications provider Verizon Communications Inc.
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