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President Donald Trump, joined by Vice President Mike Pence, speaks to members of the press at a working lunch with tax conferees from the House and Senate in the Cabinet Room of the White House on Dec. 13. IMAGE: THE WHITE HOUSE

Corporate tax cut likely to benefit region's economy

GRAND FORKS, N.D. – The Minnesota Chamber agrees:

“We are seeing from our Chamber members, and I think you’re seeing this in surveys as well, that businesses are very optimistic,” said Beth Strinden Kadoun, vice president for tax and fiscal policy at the Minnesota Chamber of Commerce.

North Dakota Chamber officials feel that way, too:

“I think from an economic and a business standpoint, we are going to see some significant investments in North Dakota,” said Brent Bogar, government affairs consultant and lobbyist with the Greater North Dakota Chamber.

At Creighton University in Omaha, Neb., the Mid-American Business Confidence Index has soared to its highest level in seven years.

And in Bismarck, N.D., the sense is that those companies throughout the region that see savings from federal tax reform will buy equipment, boost wages and/or take other actions to put the money to good use.

“That’s the feeling we are getting,” said Randy Heller, certified public accountant and partner with Widmer Roel, and the taxation committee chair for the North Dakota CPA Society.

“Most business owners that I’ve talked with, if they have the opportunity with additional cash flow to reinvest back into their company, they’re going to do so.

“They want their company to grow,” Heller continued.

“And in the Midwest, we want both our businesses to succeed and our employees to succeed with us. We want everything to grow together.”

Weeks have passed since President Donald Trump signed the Tax Cuts and Jobs Act into law on Dec. 22, and many companies still are sorting out the implications.

But while the long-term outlook for the U.S. economy remains cloudy, interviews and a review of forecasts around the Dakotas and western Minnesota make the short-term prospects clear:

They are very good. In fact, they are better and more sustainable, many analysts say, than the outlook has been in years.

And not only do the words impress, but so, too, do the actions of key companies that the tax reform has affected. More than 130 companies have announced bonuses or pay raises, affecting 2 million workers nationwide, according to a tally in early January by Americans for Tax Reform.

While many of those companies are headquartered outside of the upper MIdwest, their policies affect workers here. “AT&T, Wells Fargo, these and other companies are members of the Greater North Dakota Chamber,” said Bogar.

“And they’ve got employees here who are going to benefit from those announcements.”

Furthermore, “peer pressure exists in the business community,” Bogar added.

“When Wells Fargo raises its minimum wage to $15 an hour, other banks are going to have to be pretty close. Otherwise, people are going to take the job at Wells Fargo.”

The net result, for now, is a virtuous circle in which each new development tends to further economic growth.

“Although the inflation gauge is elevated, I would characterize the region as having a ‘Goldilocks’ economy,” wrote Ernie Goss, director of Creighton University’s Economic Forecasting Group, on Jan. 2.

“That is, not so hot as to push the Federal Reserve to raise interest rates at a stepped-up pace, but not so cool as to slow employment gains.”

Don’t misunderstand. These are odds we’re talking about, not certainties. Could events – a federal government shutdown, a war with North Korea – intervene and render all of these guesses, however educated, obsolete?

Absolutely.

And remember, the tax bill neither benefits all individuals nor all corporations directly, said Heller, the Bismarck CPA.

For example, “if I have a C corporation that historically has made $50,000 in taxable income, I may actually have a tax increase,” he said.

The old corporate tax system had brackets, just like the individual tax system does. And before the reform, a C corporation – a corporation that’s taxed separately from its owners – that made up to $50,000 of taxable income was in a 15 percent tax bracket.

Post-reform, that company with $50,000 in taxable income will pay the new, flat corporate tax rate of 21 percent, which will boost its tax bill by about $3,000. “In general, the break-even point for these corporations seems to be about $90,000 in taxable income,” Heller said.

Of course, that’s just one example of the tax reform’s impact, involving one particular business structure: C corporations – and small C corporations at that.

There also are S corporations, sole proprietorships, partnerships, limited-liability companies, single member limited-liability companies and so on. The tax treatments for all of these is different and subject to limits and restrictions.

No wonder so many companies still are doing the accounting. “On the business side, Congress didn’t really simplify the tax code,” and that remains a key complaint among organizations that otherwise support tax reform, Bogar said.

But taking all of that into account, the net result still is likely to be positive for the regional economy.

Or so says a group of savvy but dispassionate observers: economists  overseas.

“Germans fear huge loss of jobs from US tax reform,” read the headline Dec. 14 at global.handelsblatt.com.

German economists predict “significant amounts of new investment and jobs will shift from Europe to the United States,” according to the story, which cites tax experts at the University of Mannheim concluding that “Germany loses out in U.S. tax reform,” and quotes the head of a Munich-based think tank as saying, “Investments and jobs will migrate to the U.S.”

That opinion is widely shared, said the Minnesota Chamber’s Kadoun. “I think you’re hearing that in quite a few countries now, where they are concerned because the U.S. has made its taxes more competitive, and they are losing some of the tax advantages that they’d had,” she said.

Rick Thoreson is a partner at Thoreson Steffes Trust Co. in Fargo, a financial management firm. Most companies in the Midwest are small companies, and the tax reform’s key provisions tend to be favorable to them, Thoreson said.

“As I understand it, this should be a significant boost to growing businesses, allowing them to reinvest more in their companies,” Thoreson said.

As a result, “we should see a stronger business environment in our region in 2018, and perhaps even more so in 2019 when business owners and tax preparers understand it better.”

Tom Dennis

Editor, Prairie Business

701-780-1276

tdennis@prairiebusinessmagazine.com

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