Tax Reform Impact on Construction Industry a Positive
Congress recently passed the most significant tax reform legislation since 1986. The tax reform legislation will have a positive impact on architecture, design and construction companies in North Carolina and South Carolina as key provisions of the legislation will converge to drive business investment, employment and wages.
“The vast majority of construction companies will benefit from the new 20 percent deduction for qualified pass-through income, bringing the top effective rate to 29.6 percent, down a full ten points. The rest will feel a boost from the largest corporate rate cut in U.S. history,” said Mike Bellaman, ABC National President and CEO. “Changes to various accounting methods will ease burdens for many small contractors and the doubling of the estate tax exemption to $11 million is a big win for our industry’s family businesses.”
Driving consumer demand
Economic momentum was solid at the end of 2017. Business and consumer confidence are increasing. The Brookings Institute reported that 81% of taxpayers will see a tax cut from the tax reform legislation, averaging over $2,000 per year and that only 4.8% of taxpayers, primarily very high earners, will see a modest increase. The demand by consumers for goods and services will continue to increase and demand for design and construction services.
“Congress passed comprehensive tax reform legislation that will lower rates, spur economic growth and impact construction businesses for years to come,” said Stephen E. Sandherr, CEO of the Associated General Contractors of America.
Freeing up company cash
With a lower tax rate, there will be more money to invest in their businesses. This investment will take several forms. Some public companies will use the extra cash to buy-back stock. Others will invest in their businesses via investment in capital expenditures (CAPEX), new hires, and increased salaries and benefits for their employees. Keeping more capital in the business allows for investment. Capital-intensive businesses such as manufacturing companies can utilize the additional capital to fund the cost of facilities and equipment. Investment in manufacturing has the highest multiplier effect of any industry. For every $1.00 spent in manufacturing, another $1.89 is added to the economy.
“We are capital-intensive, cash-flow challenged, domestically oriented industry comprised mostly of small, family-owned and closely held merit shop construction companies employing hard working Americans,” Bellaman added. “Our members have waited for Washington to let them keep more money in their paychecks, which would enable them to invest back in their businesses, create new jobs in their communities and grow the economy. The wait is finally over.”
The new legislation will have a significant positive impact for small to midsize businesses. These companies, which traditionally relied on bank loans for additional capital, will be able to take an immediate tax deduction to use as equity for their investment, thus encouraging further growth and expansion.
Another potential plus for design and construction firms is the tax advantages for smaller firms. “Gaining tax relief for architects who organize as pass-through companies—which includes the majority of U.S. architecture firms—is a significant improvement over earlier drafts, said Carl Elefante, National AIA 2018 President. “So is preserving at least in part the Historic Tax Credit, which was totally abolished by the original House tax reform bill.”
Investment in people
According to the Tax Foundation, the tax legislation will lead to the creation of nearly 600,000 full-time equivalent jobs. In addition to more new jobs and capital investment, legislation is expected to result in higher salaries and better benefits. In the recent National Association of Manufacturer’s survey, almost 54 percent of CEOs in the survey said they would hire more workers, and nearly half (48.8 percent) said they would increase employee wages and benefits.
“Construction firms appear to be very optimistic about 2018 as they expect demand for all types of construction services to continue to expand,” said Sandherr. “This optimism is likely based on current economic conditions, an increasingly business-friendly regulatory environment and expectations the Trump administration will boost infrastructure investments.”
Repatriation
A recent Goldman Sachs study reported that US firms have over $3.1 trillion invested overseas. The provision of the tax reform will serve as a strong incentive for these firms to bring this investment back home. This investment will be in the form of property, plants and equipment for facilities.
Prior to the legislation, the U.S. had one of the highest corporate tax rates in the world. The U.S. marginal tax rate was 35%. With the new legislation, the new corporate tax rate will be 21%. According to the Tax Foundation, the average tax rate amongst developed countries was 22%. By aligning U.S. corporate tax policy with other industrialized countries, Americans stand to gain as companies bring cash back.
More competitive
U.S.-based manufacturers who are doing business overseas and competing with foreign manufacturers will also be more competitive. The previous tax code put American manufacturers at a competitive disadvantage. Having a lower corporate tax rate helps level the playing field for companies that are competing with Asian and European companies that have a lower tax rate in their home country. This will bode well for design and construction firms as the Carolinas will benefit from increased investment in manufacturing plants.
According to David Melcher, CEO of the Aerospace Industries Association, the “legislation will unleash our industry’s global competitiveness and potential to create jobs for the American people.”
Regional impact
The cap on state tax deduction at $10,000 is likely to impact location decisions by citizens and companies. The high cost of living and high tax states will be at a disadvantage. A likely result of the legislation is that businesses will choose to invest in lower costs and lower tax states like North Carolina and South Carolina. Businesses will want to invest in areas where their employees have a good quality of life and a low cost of living.
North Carolina and South Carolina are well positioned to benefit from this at the cost of the Northeast and California.
Brian Gallagher is vice president, marketing, for O’Neal, Inc., an integrated design and construction firm based in Greenville, SC. Email him at: bgallagher@onealinc.com.
