The tax reform bill that was signed into law on December 22, 2017 has many implications for individuals and
businesses in 2018. Among other things, the bill includes a doubled standard deduction, a higher exemption
from the estate tax, and limits on state and local tax deductions. Perhaps the largest change included in the
bill is the reduction in the corporate tax rate from 35 percent to 21 percent. Even for companies that are not
currently paying the full 35 percent tax rate, the new rate is likely to be a significant reduction in their tax
burden. So, what exactly are companies going to do with the increased funds?
There are several possible ways that corporations may allocate their tax savings. Buying back shares,
increasing dividends or ownership payments, increasing capital expenditures, hiring more workers, and
increasing pay for employees have all been mentioned as ways that the money may be spent.
Around the time the bill was signed, several companies announced bonuses or increased pay for their
employees. AT&T was the first, announcing a $1,000 bonus to many of its workers. Fifth Third Bancorp, a
regional bank, decided to provide a $1,000 bonus, as well as increase the minimum wage for all its employees
to at least $15 per hour. Wells Fargo also said that it would increase the minimum wage for its workers to
$15 an hour. Boeing announced improvements to its benefits plan, as well as investments in workforce
training and facilities. It is likely that other companies will follow suit in 2018 as they fully understand the tax
bill changes.
There have also been indications that the slow pace of wage growth the U.S. has experienced since the
recession is beginning to accelerate, and companies would do well to consider these changes in addressing
their potential increase in net income from the tax law. The Labor Department reported that hourly earnings
rose 2.9% in January, the largest year-over-year increase since June 2009, when the recession ended. Pay is
rising at double the national average in metro areas such as Minneapolis, Denver, and Ft. Meyers, with
unemployment near or below 3%. Employers in these metro areas are raising pay at or above pre-recession
levels, and competition for skilled workers is especially intense. We believe that wage growth in these cities
can be viewed as a bellwether for the country as the economy and labor market continue to improve.
Besides pay increases related to the tax reform bill, 18 states and a number of U.S. cities increased their
minimum wage in 2018. Many of the states that are increasing their minimum wage are making substantial
changes; in fact, the average increase among the 18 states is 4.4%, pointing to increases that go beyond the
rate of inflation. Besides those who receive a pay raise directly due to the increases in minimum wage, other
workers may be impacted as companies raise the pay for other hourly workers in order to control for wage
compression in their pay structure.
Providing one-time bonuses may garner media attention, but the impact is short lived and doesn’t take into
account increasing hourly earnings. Indicators are pointing toward increases to general wages for the first
time since the recession, and 2018 may be the year that pay increases go beyond the 3% increase that has
been typical in recent years. Companies may be wise to revisit their compensation systems in 2018 to ensure
their ability to attract new hires, provide competitive pay to existing employees, and strengthen the link
between pay and performance. Since the recently passed tax bill focused on substantially reduced corporate
tax rates and will result in increased profits, companies who have funds available should consider whether
their pay systems need an update in 2018.
-The POE Group
www.POEGroup.com
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