Tax reform generates uncertainty
Advisers say short- and long-term effects are hard to know; nonprofits fear decline in charitable giving.
Many analysts are saying the 495-page tax bill signed into law Dec. 22, the first significant tax reform passed since 1986, is so complex it’s hard to predict what will happen next.
But a local tax professional, wealth manager and nonprofit director are saying some impacts of the law are clear enough — whether one views them as positive or negative.
Phil Mitchell, president, principal and CPA at Grand Rapids-based tax and investment strategy firm Kroon & Mitchell, said many of his small business clients are likely to see short- and medium-term gains with their newfound ability to deduct 20 percent from pass-through income.
“Right now, if you look at the typically (West Michigan) type of business, and they’re making under $300,000, they may be one of the winners,” he said. “A lot are S corps or sole proprietorships or partnerships, and they will be able to deduct 20 percent in qualified business income.
“They may be able to acquire new employees, new property or new equipment. If (their) taxes are lower, what will they do with the profit?”
He said benefits they see from deductions could be offset by other changes, though, such as the repeal of the individual mandate, which could make health benefits more expensive. Tax law affecting small businesses could evolve in the next seven or eight years, too. And many of the individual tax breaks are set to expire in 2025.
But corporations would see a permanent gain, with the new 21 percent corporate tax rate, down from 35 percent previously. Mitchell sees this as a potential economic boon.
“Anytime there are lower taxes, it’s the potential to reinvest it,” he said. “It’s a multiplier effect.”
He conceded it’s hard to say how individual corporations will choose to use the savings.
“With the tax savings, will they reinvest to increase growth, create new products, buy back shares, sell more dividends? We don’t perfectly know what companies will do with it,” Mitchell said.
He noted banks like Fifth Third and PNC and telecommunications companies such as AT&T have announced wage hikes and bonuses for their employees following passage of the tax bill.
“They may do a lot of their business in the U.S. and not abroad, so this is a big benefit for them,” he said.
Other corporations like Apple may choose to keep production where it is, or they might choose to bring profits back to the U.S. since the tax rate will be 1 percentage point lower than the global average of 22 percent.
Mark Periard, director of wealth management at Legacy Trust in Grand Rapids, said he believes his clients, who also are mid to high income, will see net positives from the new tax structure.
“When I’m sitting with a business owner, I really believe they’re going to pay less in taxes because of the reduced corporate tax rate,” he said. “On the income tax side, across the spectrum, the high net-worth people will more clearly benefit from the tax rates.”
He said due to the complexity of the bill and its impacts, attorneys and CPAs will be called upon to advise much more than they currently are.
“One of the negatives is everybody will have to look at their own situation and do careful, thoughtful planning,” he said.
Charisse Mitchell, CEO of the YWCA West Central Michigan (no relation to Phil Mitchell), said nonprofits are not looking on the bill so favorably.
It nearly doubles the standard deduction for married couples who file jointly to $24,000, up from $12,700, and to $12,000 for individuals, up from $6,350.
Doing so shrinks the pool of people who gain tax benefits from itemizing charitable giving, she said.
“I think for nonprofits in general, the biggest concern is the big disincentivizing of charitable giving,” Charisse Mitchell said. “As nonprofits, we rely on people who choose to invest in the nonprofit sector, whether we’re serving vulnerable populations or enriching the arts or making green spaces viable and beautiful — those things are driven by the work nonprofits do.
“By increasing the standard deduction, what it does is disincentivize charitable giving. When those incentives to give are taken away, people respond accordingly. We’re by nature economic beings.”
She said there is evidence to suggest a drop in giving will happen based on the aftermath of charitable giving tax credits being removed in the past.
“Michigan’s charitable tax credit for giving to community foundations was eliminated in 2012,” Charisse Mitchell said. “It was an incentive. We have evidence to suggest it decreased giving.”
The Council on Michigan Foundations, in partnership with the Johnson Center for Philanthropy at Grand Valley State University, recorded a loss of $1,153,614 in giving to Michigan foundations the year following the elimination of the Community Foundation Tax Credit.
“That’s just in contributions to foundations as a response to eliminating of that particular tax credit,” Charisse Mitchell said. “We’re now talking about charitable giving as a whole. If that impact for foundations was $1 million, I can imagine what that might look like on a much broader scale.”
A loss in giving also could mean workforce reductions for nonprofits, she said.
“I think one of the things people talk about in the tax bill is it’s designed to spur jobs. In West Michigan, nonprofits are a big provider of jobs,” Charisse Mitchell said. “If we aren’t able to meet demand and don’t have the ability to employ people, it does have a significant impact.”
She said West Michigan has one of the largest nonprofit economies in the country and would thus be disproportionately affected.
Charisse Mitchell said the YWCA does not yet have a plan to cover potential funding shortfalls, but it won’t be able to fall back on belt tightening.
“I don’t know of any nonprofit who hasn’t already done the ‘let’s-get-leaner-and-more-efficient’ thing,” she said. “I would put our level of efficiency and leveraging of resources up against any big corporation.”
Phil Mitchell said he thinks people will still donate to causes because they want to help.
“A lot of people don’t get the benefit of giving, but there are still people who want to benefit their church, animal shelter, charity, even without the itemized deductions,” he said.
“Those who donate the most, the many thousands of dollars, you still can itemize that; that’s not going away. You can itemize or take the standard deduction.”
Phil Mitchell and Charisse Mitchell agree on one thing: Communication will be crucial.
“Part of it is engaging the community and saying, ‘There is a level of investment that has to happen for the community to remain strong,’” Charisse Mitchell said.
“For any (nonprofit) that thinks they’re going to be negatively impacted, they’ve now got to show their benefits so people will give,” Phil Mitchell said.
Charisse Mitchell said more than looking at what can be gained on an individual or business level, taxpayers need to look at how the economy as a whole will be affected.
“We hope people are mindful of and are thinking about the ultimate impact of things like this, beyond the immediate impact on the economy and the debt,” she said.
Periard said he believes West Michigan will maintain its equilibrium despite the changes.
“If I was thinking broadly about pros, I always look at it from the West Michigan standpoint,” he said. “How do family businesses benefit? We have a higher preponderance of family businesses here. They are good stewards of wealth, where they take profits and share with the community.
“I’m hoping that means they invest these savings in the community and reinvest in themselves for the good of generations to come.”