On June 6, 2018, representatives from academia, the private sector and government convened at the Urban Institute in Washington D.C. to examine the effect of the recently enacted federal tax reform on financial reporting and investment incentives. The UNC Tax Center, an affiliated of the Kenan Institute of Private Enterprise, co-hosted the event with the D.C.-based Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.
Tax Policy Center Director Mark Mazur and Kenan Institute Director Greg Brown provided introductory remarks to set the tone for the day’s discussions.
“I can imagine few topics that are more squarely in the intersection of business and taxes than the Tax Cuts and Jobs Act [TCJA] of 2017,” Brown told the audience. “These sweeping changes will definitely have a significant impact on how investment incentives and financial reporting are done, not just in the current year but for many years to come.”
The first panel, moderated by UNC Kenan-Flagler Business School Assistant Professor of Accounting Jeff Hoopes, looked at the effects of the TCJA by industry. Panelists included Wharton School Professor of Accounting Jennifer Blouin, Kenan-Flagler Professor of Accounting and UNC Tax Center Director Ed Maydew and Tax Policy Center Senior Research Associate Joseph Rosenberg, who shared their thoughts from an accounting and economics perspective.
Rosenberg kicked off the discussion with an overview of the impact the TCJA will have on business investment in the U.S. His analysis suggested an improved environment for business investment, but only in the short term. Over time, the projected economic boost will fade, thanks in large part to the expiration of 100 percent expensing, delayed effective dates for R&D capitalization and tighter interest deductibility limitations.
Among other things, Blouin pointed out the importance of considering how specific reform provisions affect financial statement effective tax rates. For example, while both the 100 percent expensing and tax rate cut would decrease cash taxes paid by businesses, only the tax rate cut would decrease tax expense reported on the financial statements.
Maydew expanded on this thought by reviewing evidence that businesses care not just about cash tax outlays, but about financial reporting incentives as well.
“Financial accounting matters for decision-making, even though you might not think it would initially,” Maydew emphasized. “There’s a lot of evidence in the accounting literature that it matters on the margin. If we think about that and incorporate that in our research and our policymaking, we will get better policy.”
A second panel, moderated by Politico Senior Tax Reporter Brian Faler, focused on perspectives from the field. The discussion included Todd Castagno, equity research analyst at Morgan Stanley, Banks Edwards, managing partner at Deloitte’s Washington National Tax Practice, and Ben Page, senior fellow at the Tax Policy Center.
Castagno’s analysis showed that despite recent attention given to increases in stock buybacks and compensation, companies were also using newly repatriated cash to increase pension contributions and fund acquisitions. As a follow-up to the previous panel’s discussion of the difference between the financial statement effective tax rate and the actual cash tax rate companies paid, Castagno explained that reform should lead to a convergence between these two rates.
Edwards discussed the complications and uncertainty accompanying tax reform. In the near term, much of this stems from financial reporting requirements. Firms had to reflect the effect of the tax reform measures in their 2017 year-end financial statements, and will continue to do so in all quarterly filings for2018. With limited exceptions, this reporting is required despite a lack of Treasury Department guidance on the appropriate application of the new rules. In the meantime, the SEC has made an unexpected and unconventional move that gives companies more flexibility to correct 2017 filings as needed once guidance is available. Whether this flexibility extends to 2018 reporting remains an open issue. All of this, according to Edwards, is putting a great deal of stress and strain on companies’ financial reporting.
In response to other panelists’ comments, Page challenged the conclusion that companies are increasing investment. He said that if companies are so uncertain about how to apply much of the major new tax provisions, it’s hard to imagine them committing to significant new investment in response to these provisions.
In addition, Page reminded the audience that the goal of the tax bill was to make an impact on the overall economy.
“It’s an important thing to try and track, but the central problem in trying to look at economic data and evaluate the effects of any tax legislation is that you don’t know what would have happened otherwise,” Page shared. “You can always make the argument that whatever is going on in the economy isn’t really related to the tax bill or whether what [it] would have done is being offset by other things.”
Despite the general consensus that there is still much ambiguity around the TCJA, the conference was a chance for various constituencies to begin talking and working together to understand the act’s implications.
“Today’s panels allowed thought leaders in the taxation space to share insights and knowledge on the impact of the Tax Cuts and Job Act,” UNC Tax Center Associate Director Courtney Edwards said. “The perspectives shared between the practioners and academics here today show the importance of information in the aftermath of this legislation.”
Check out the Tax Policy Center’s TaxVox Blog for more on the event.
For more information on upcoming Kenan Institute events, visit kenaninstitute.unc.edu.