Federal legislation has provided a huge windfall for some of Louisville’s largest employers, with Humana alone paying about $1.2 billion less in federal income taxes last year than in 2017.
However, a closer look at filings with the Securities and Exchange Commission reveals a more complex picture, with some local corporations, including Brown-Forman and Yum Brands, actually paying more in federal income taxes last year than in 2017. And even Humana’s windfall was essentially wiped out by an Affordable Care Act-related health insurance fee.
While employees appear to have gained little direct benefit from the tax cuts, shareholders of most Louisville-based companies saw their dividend payouts increase. The trajectory of share buybacks, which benefit shareholders and company executives whose remuneration is tied to financial measures such as earnings per share, was mixed.
Some local corporations also significantly increased their capital expenditures, which economist say, should boost productivity and benefit workers in the long run.
While one economist told Insider that the Tax Cuts and Jobs Act of 2017 has not been the game changer that its proponents said it would be, another economist said that it is too soon to gauge the legislation’s impact.
Insurance, packages, autos
Humana paid about $139 million in federal income taxes in 2018, or about $1.2 billion less than the prior year. The Louisville-based company’s tax bill declined in part because of deteriorating business results: Humana’s income before taxes in 2017 was just over $4 billion. In 2018, it was just over $2 billion.
Humana declined to comment for this story because a spokeswoman said it is in “the quiet period” before first-quarter earnings, which will be released May 1.
The insurer said last year that the lower corporate income tax rate would allow the company to raise the minimum hourly wage for full- and part-time employees in the continental U.S. to $15 and accelerate a performance-based incentive program for employees. The incentive program sets a minimum target of 4% of the employee’s base salary, with payouts to occur (or to have occurred) this month.
The company has declined to say how many employees are affected by either policy change, so the overall impact is difficult to determine. At the end of 2018, Humana had 41,600 employees, down 9.4% from a year earlier, according to its annual report.
Humana last year also increased its dividend payout to shareholders to $265 million, up $45 million from 2017, but it reduced its share buybacks to about $1.1 billion, down nearly $2 billion from 2016.
While the tax cut clearly proved to be beneficial for Humana, other moves by the federal government hurt the insurer’s bottom line. For example, an annual insurance industry premium-based fee, imposed by the Affordable Care Act, commonly known as Obamacare, cost Humana about $916 million in 2016 and just over $1 billion in 2018. The fee was suspended for 2017, will be suspended again this year but is scheduled to return in 2020.
Louisville’s largest employer, UPS, paid $89 million in federal income tax last year, or $582 million less than in 2017, on revenue of $58 billion. The logistics company, based in Atlanta, increased its dividend payout to shareholders to just over $3 billion, up $240 million from the prior year, though it reduced its share buybacks by more than $800 million.
UPS also increased its capital expenditures to nearly $6.2 billion, up more than $1 billion from 2017, and added 25,000 U.S.-based employees last year. The company employed nearly 400,000 people in the U.S. last year.
Louisville’s second-biggest employer, Ford Motor Co., paid $75 million in federal income taxes in 2018, which was more than it paid in 2017. In fact, Ford received a federal income tax benefit of more than $100 in 2016 and 2017 each.
Ford also spent $2.9 billion on dividends, which was up about $320 million from 2017, but down about $470 million from 2016. The amount of cash Ford spent on purchases of common stock rose to $164 million, up $33 million from 2017.
Ford, too, increased its capital expenditures. It spent nearly $7.8 billion in 2018, up more than $700 million from 2017. The number of U.S.-based employees stayed the same, at 100,000.
It’s difficult to determine what exact impact the tax cut had on dividends, buybacks and capital expenditures. For example, if UPS had paid $600 million more in federal income taxes last year, it may have increased its dividend payout by less than it did — or it might have decreased its share buybacks by even more or decreased its capital expenditures. At the same time, even without the tax cut, the company may have been prompted to spend just as much to improve and expand its capabilities because of pressures from competitors.
Gambling, pizza, bourbon
Louisville-based companies Churchill Downs, Papa John’s and Texas Roadhouse saw their federal income tax bills decline by a combined $93 million. Papa John’s, which in 2017 paid a federal income tax bill of $29 million, received a tax benefit last year of $5 million. But that $34 million turnaround is only partly a result of a lower tax rate, as it also was affected by troubles brought on by deleterious comments of its founder, John H. Schnatter. The company’s income before taxes last year was $5.9 million — down 96% from the $140.3 million it reported in 2017. The company could not be reached for comment.
Yum Brands and Brown-Forman together in 2018 paid $143 million more in federal income taxes than in 2017.
The distiller told Insider via email that its tax bill went up in part due to “one-time items related to the 2018 tax reform” and that it expects a lower effective tax rate this year.
And, a company spokeswoman, Elizabeth Conway, said, any beneficial impact from the tax legislation was more than offset by retaliatory tariffs placed upon American distillers by the European Union, China and other countries. Conway said those tariffs have an estimated annual impact of $125 million, which cut into corporate profits and/or are passed to consumers through higher prices.
Churchill Downs, Papa John’s and Yum Brands saw their total employment fall from 2017 to 2018, while Texas Roadhouse added 8,600 employees and Brown-Forman added 100 — though none in the U.S.
One economist skeptical, another asks for patience
Gus Faucher, senior vice president and chief economist of PNC Financial Services Group, told Insider that he has been skeptical about claims that the tax legislation would lead to more company investments and productivity.
Faucher said that many companies already were highly profitable and were using much of their cash for higher dividends and more share buybacks.
The economist said that he expects the legislation to provide a mild lift to the economy in the near term but create no overall impact in the long term.
“It hasn’t harmed the U.S. economy,” he said, “but it hasn’t been the game changer it was advertised as.”
While the Congressional Budget Office projects that the legislation would increase the country’s overall deficit by about $190 billion annually through 2028, Faucher said that the legislation’s overall impact on the federal debt, at $22 trillion, is “pretty small.” Nonetheless, he said, the nation should be concerned about its overall level of government debt and its potentially reducing long-term growth.
Kevin Kliesen, business economist and research officer with the Federal Reserve Bank in St. Louis, told Insider that it likely will take years before the true effects of the federal income tax law are known.
He said he looks primarily at the tax law’s effect on capital expenditures and whether the lower rate in the U.S. is prompting companies, especially those based outside of the country, to make investments in America.
Capital spending last year increased at a healthy clip, Kliesen said, though it’s tough to disentangle what portion of the spending was a result of general economic growth or the tax cuts.
“Those things are going to play out over several years,” he said.
Investments in new technologies tend to benefit workers because it makes them more competitive and productive, Kliesen said, ultimately allowing employers to pay higher wages than their competitors, which allows the companies to attract a higher caliber of worker.
At the same time, he said, businesses make decisions about capital investments based on many factors, not just on how much cash they have because of a lower tax bill.
“Clearly, firms are going to make this calculation … if we put in place this new piece of capital are we going to be able to generate a higher rate of return on this capital than the next best alternative,” Kliesen said. “If they’re sitting on a pile of cash and they don’t see any good investment opportunity, for whatever reason, they may just sit on that cash and wait.”
Those decisions also are affected by larger economic forces that may trump tax policy matters, he said.
“Uncertainty is at a high level, .. (and) when uncertainty levels are high, firms tend to pull back and just kind of wait until the fog clears,” he said. “They may work their existing labor force longer or harder rather than hire new workers. They may use their existing capital longer … (rather than) replacing their capital just because they can’t readily identify what the rate of return … might be under this period of elevated uncertainty.”
In addition, Kliesen said, businesses are affected by larger structural changes, such as e-commerce companies replacing brick-and-mortar stores, which is boosting investments in warehouses but reducing investments in traditional malls. Technology also is prompting more people to work from home, which is reducing demand for and investments in office space.
“So you have all these other things going on,” Kliesen said.
And most large multinational companies have competitors in other countries, which means they have an incentive to keep up regardless of domestic tax policy, he said.
The tax cuts’ impact on wages, too, is difficult to determine, in part because how much people get paid depends on many other factors, including their skills, knowledge, experience and productivity improvements.
“People want to look at … whether those effects are immediate, but … it can take a while for the effects to show up,” Kliesen said.