While the government grapples with the latest tax reform bill, cable and telecom operators are waiting patiently for what could be a substantial windfall.
The bill is controversial among consumers — some have argued that it favors the wealthiest Americans. But for corporate America the benefits are simple: The new deal would slash the business tax rate from about 35% of profit to 20%. With more and more cable companies looking at a near future where they become full cash taxpayers, that could represent a substantial savings.
Profit vs. Spending
The cable business was founded on the premise of paying as little to the government as possible. And that was true during the early days of the industry, when operators borrowed heavily to build out networks, eschewing profits in favor of spending to build a network for the future.
Many operators still are not full cash taxpayers. Charter Communications for example, according to its 10-K annual report, has about $11.2 billion in net operating loss carry-forwards — an accounting method to reduce taxes — that expire between 2018 and 2035. But other operators have become taxpayers as capital expenditures have declined and profits have soared.
The House of Representatives voted to approve the bill last Thursday (Nov. 16) by a 222-205 margin, largely along party lines in the Republican-controlled body.
While that approval was largely expected, the next move may be trickier. The Senate has its own version of the bill — the main differences are centered on consumer, not business issues — which will be voted on in December. If that bill is passed — the Senate has a thin two-seat Republican majority — it will then need to be amended with the House bill and voted on again.
There is no guarantee that the bill will get passed — the House also passed health care reform, which has gone nowhere to date. Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak added that it continues to be a tough call, especially with the House and Senate offering different bills.
But as legislators hash out the vagaries of the bill, Comcast, AT&T and Verizon are already closing in on become full cash taxpayers. The three companies paid 27%, 26% and 18%, respectively, of pre-tax income to the government in 2016, according to UBS research.
Comcast’s cash income tax rate was 35.7% in 2013, 21% in 2014, 29% in 2015 and 27% in 2016, Wlodarczak said. He estimated the rate will be about 30% in 2017.
President Donald Trump has pushed for the rate to fall to 15%, while House Speaker Paul Ryan has put forth a 20% rate. Still, even at that more conservative level, the savings could be substantial. UBS estimates that every 5% decline in the corporate tax rate translates to a $1 billion to $1.5 billion annual benefit, or a 5% to 10% increase in earnings per share and free cash flow at each of the three companies.
“In other words, a corporate tax rate of 20% (in line with Paul Ryan’s proposal) would drive accretion of 15%-plus,” UBS wrote.
Verizon declined comment, but according to UBS could see its taxes reduced from an estimated $8.7 billion in 2017 to $4.2 billion in 2018 if the bill is passed.
Another windfall could be the extension of bonus depreciation, which allows companies to deduct capital expenditures on an accelerated basis. Bonus depreciation is currently at 50% and would be bumped up to 100% for five years before returning to normal rates, according to the bill. Some estimates have put the bonus depreciation savings at between $1 billion and $2 billion annually for the three companies alone.
AT&T has already come out in favor of the bill, adding that a 20% corporate tax rate would allow the company to invest an additional $1 billion to stimulate job creation and economic growth.
“With a rate of 20%, combined with provisions for full expensing of capital expenditures for the next five years, we’re prepared to increase our investment in the United States,” AT&T chair and CEO Randall Stephenson said in a statement. “If the House bill is signed into law, we’d commit to increase our domestic investment by $1 billion in the first year in which the new rates are in place. And research tells us that every $1 billion in capital invested in telecom creates about 7,000 good jobs for the middle class.”
In a conference call with analysts in January to discuss fourth-quarter results, Comcast chair and CEO Brian Roberts said tax relief and/or regulatory reform — like a repeal of Title II — could lead to more investment.
“We’re looking forward to working with the new administration and the new regulatory leaders to try to frame something that’s good for consumers,” Roberts said in January. He added that such moves would create a more stable platform that should allow companies to accelerate business opportunities.
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