While we’re thinking about taxes

“Today is the first day of the rest of your taxable year.”

– Jeffrey Yablon, a Washington tax lawyer
who has compiled an extensive and amusing
collection of quotations on taxes and life

I know, I know – we’d like to forget about taxes now that we’ve survived the annual runup to April 15. But this post-deadline breather actually may be a good time to think about taxes and how they relate to our mission in investor relations.

Taxes on corporations and various aspects of business are bound to change – OK, I really mean bound to increase – in the coming years. IR people need to be looking ahead to understand the impact on our companies’ P&Ls.

The first round of disclosures came three weeks ago after health reform became law. A few companies disclosed that one change in the health law will cost them billions in additional taxes (see post on Disclosing ObamaCare’s impact). This caused a brief outrage and flurry of saber-rattling in Congress, until lawmakers thought better and canceled a hearing that would have grilled executives on the GAAP-required charges. That would have given business leaders a forum to testify on the actual costs of what Congress passed.

What’s next? Hard to say, but various changes are in the works …

  • New taxes under the 2010 healthcare law will impose costs on pharmaceutical companies, medical device makers, and health insurance companies …
  • Not to mention the cost of healthcare coverage requirements, which everyone’s still sorting out, including a $2,000 a head penalty for employers who don’t cover workers and an excise tax down the road on “Cadillac” health plans …
  • President Obama has proposed taking away foreign tax credits and deferrals for US companies, a potential $200 billion of additional revenue …
  • The president has proposed taxing large banks and financial institutions to pay for the bailout …
  • Unless something changes, the “Bush tax cuts” will expire at the end of 2010 for individuals – including both the 15% maximum capital gains tax and 15% maximum tax on qualified dividends. Higher marginal rates on stock-related income will affect shareholders; it’s hard to say how this tax increase might affect dividend policy or other ways of returning cash to shareholders.
  • Other taxing ideas are floated almost daily. As a non-accountant and non-politician, I won’t attempt to lay odds on the various proposals. But Washington is on the hunt for revenue – that much we know.

Already, the US imposes the second-highest corporate tax rate among the world’s industrialized countries – 39.1% in combined federal and average state taxes – according to 2009 OECD data cited by the Tax Foundation. (This site also has a state-by-state comparison of combined corporate tax rates.)

The effective tax rate – what companies actually pay after working the system – is the operative issue for disclosure, along with potential balance-sheet impacts of deferred tax assets or liabilities. The conservative Cato Foundation estimates the US effective tax rate at 36%.

You don’t hear many analysts or investors on conference calls asking about effective tax rates, but what kind of dollar impact would a 1 or 2 percentage point increase – or decrease – in tax rate have on your P&L? Put a calculator to it. Have a conversation with your company’s tax people. Write your congressman.

And consider the potential need for disclosure as new tax policies continue to take shape in Washington.

Happy first day of the rest of your taxable year!

© 2010 Johnson Strategic Communications Inc.

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One Response to “While we’re thinking about taxes”

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