Focus: Industry Sector Implications of Tax Cuts

Provided by CCH, Inc.

The recent passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) (P.L. 108-27) has left people wondering how effective these new tax cuts will be in stimulating the economy. According to various industry representatives, it appears that the stimulative effect of JGTRRA can be measured on two fronts: real and perceived, both of which are vital to their respective recoveries. Clearly, many of the provisions of JGTRRA will translate into real cost savings for businesses but, from a psychological perspective, the tax cuts are likely to boost confidence levels and, therefore, will have a positive impact on the spending habits of consumers and businesses.

Technology Sector

Without question, the technology sector has been one of the industries hardest hit by the economic downturn, as anyone holding technology stocks in an investment portfolio can attest to. However, it appears that the JGTRRA cuts are already having an effect, and this is just the beginning. Harris Miller, President of Arlington, Virginia-based technology trade group Information Technology Association of America, told CCH that, "aside from looking at the impact of individual provisions, simply getting a package passed was incredibly important in order to provide technology businesses certainty for planning purposes." Miller noted that the passage of JGTRRA involves a psychological component in that the removal of uncertainty now gives businesses a firm footing upon which they can begin to rebuild their businesses by investing capital and exploiting JGTRRA's more business-oriented provisions. "Because the pendulum was swinging wildly in Washington ... people were certainly holding back investment decisions," he said.

Many have speculated that the dividend tax-rate cuts provide little tax relief for firms in the technology sector because those business tend to reinvest their earnings in research and development and do not typically declare dividends. However, technology juggernaut Microsoft recently declared its first dividend ever, a move likely to boost confidence in the sector and in the economy overall. Miller noted that the technology sector would see benefits from the dividend tax-rate cuts because there are technology companies that do declare dividends, and "the rate cuts also impact a lot of our customers, and if the rate cuts improve the confidence level and financial condition of our customers, then it is also good for technology companies."

Miller added that the expansion of the Code Sec. 179 expensing provision provides key incentives for small businesses to make capital investments in technology that may, in turn, indirectly benefit businesses in the technology sector. "There are 23 million small businesses in America, and many of them make technology investments. We think that the small business community, if they respond as we expect, will be one of the forces the drives the recovery of the information technology industry," said Miller.

Manufacturing Sector
Another key economic sector, manufacturing, will also see benefits similar to those expected in the technology sector. Dorothy Coleman, Vice-President of Tax Policy for the National Association of Manufacturers (NAM), told CCH that she expects the JGTRRA cuts to provide both psychological and real economic benefits. "While most of our members do not declare dividends, the larger companies that do, will likely see their stock become more attractive to investors, raising their stock price," said Coleman. While the psychological impact of the dividend tax-rate cuts on stock prices will not improve the financial condition of companies, Coleman expects equity financing to become more prevalent in the future, lowering the reliance on debt issuance and improving a company's credit-worthiness.

More immediately though, Coleman said that she has already received reports from NAM members now planning to make capital improvements based on the expansion of the Code Sec. 179 expensing allowance. "One of our members called me and said that, as result of the tax cut, he would now pursue a $350,000 capital investment that he had been putting on hold in order to expand his business," said Coleman, adding that "this is the kind of thing we can expect to see." In addition, she noted that the expansion of the special bonus depreciation deduction, along with the Code Sec. 179 expensing provision, offers manufacturing businesses a "one-two punch" that will drive capital investments, particularly for smaller companies.

As for the impact on the manufacturing sector as a whole, Coleman noted that, while the sector has been in a "slump," there are "some very positive signs lately" and that the tax cuts "will definitely have an impact." According to Coleman, "one of the biggest problems with this recovery is the lack of business investment. I think these tax incentives will help spark that investment." She added that the reduction of income tax rates will likely boost consumer spending, helping to drive the manufacturing sector by increasing demand.

Real Estate Sector
The impact of the dividend tax-rate cuts appears to have already lead to an immediate bump in equity markets. This has caused some to speculate that investors may begin to take cash out of stable investment vehicles, such as real estate investment trusts (REITs), opting for riskier investments with a higher potential upside. Tony Edwards, Senior Vice-President of the National Association of REITs (NaReit), told CCH that, "certainly this was the case prior to the market crash in 2000," but added that, in the aftermath of the bubble-burst, investors sought REIT investments for stability and cash flow.

Despite indications that equity markets are again on the rebound, Edwards said that he does not expect investors to flee REITs. "REITs offer specific advantages not offered by other types of investments. For most investors, REITs may be the only way an individual can participate in real estate investments. And, portfolio managers are now recognizing the role real estate plays in diversification for the sake of stability," he said. In addition, Edwards noted that "there is an increasing number of investors, such as those nearing retirement age, who are seeking cash-yielding investments offered by REITs." Edwards speculated that the current buzz surrounding the dividend tax-rate cuts may actually be good for REIT investments because it will focus investors' attention on investments that generate cash yields.

REITs also perform well historically, noted Edwards. According to NaReit data, REITs have outperformed the S&P 500 and the Nasdaq over the last 10 years and have averaged a 12.2 percent return year-to-date. Edwards also observed that REIT dividends are currently being paid at rates that are three times higher than non-REIT dividends, taking into account the impact of the new tax cuts.

By Daniel Rinke, CCH News Staff

You may like these other stories...

Tesco says it overstated profit forecastStanley Reed of the New York Times reported that Tesco, the large British grocery retailer, disclosed on Monday that it had overstated its expected half-year profit by about $400...
The IRS has announced the special per diem rates for 2014-15 that taxpayers can use for substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. The new per diem rates...
The issue of international assignees was, for a long time, limited to a small number of companies – meaning only those that operated on an international scale. But in recent years, global expansion has shifted into...

Already a member? log in here.

Upcoming CPE Webinars

Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 21
Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience's communication style.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.