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Why the Business Side of Showbiz Loves Tax Reform

Major media companies stand to save billions under the Senate version of tax reform, which may come to a floor vote this week, and studios also stand to benefit from a provision designed to encourage production in the United States.

The industry has lobbied for years for changes to the tax code, starting with a drop in the corporate tax rate, which is currently at 35%. The House and Senate versions of tax reform call for dropping that to 20%.

On Tuesday, President Donald Trump visited Capitol Hill to try to rally Republican lawmakers to support the bill, intent on scoring a signature legislative achievement before the year is out. Senate Majority Leader Mitch McConnell has indicated that the bill could make it to the floor later this week, perhaps as soon as Wednesday, although the vote is expected to be close.

The support that studios are showering on tax reform legislation, however, stands in contrast to what a number of progressives within the industry think about the tax bill, that it benefits the rich at the expense of the poor. Some, like Rob Reiner and Adam McKay, have taken to social media to warn against it. Others have pointed to some analyses, including those from the Congressional Budget Office, that show that the Senate bill would harm those in lower income groups, and over time even those in middle income levels would see tax increases. The individual income tax cuts expire in 2026, and even though the expectation is that Congress would renew them, that has some lawmakers concerned about the ultimate impact on the federal deficit.

The CBO analysis showed that those in lower-income levels would be particularly hurt by a provision that would repeal the individual mandate of the Affordable Care Act, as it would drive up the cost of health insurance premiums. It also would add an estimated $1.4 trillion to the federal deficit over the next decade, the CBO said.

As media companies lobby for the legislation, along with other major industries, some entertainment labor groups have come out against it.

The Actors Equity Association put out a statement objecting to the Senate bill’s proposed elimination of a host of personal income tax deductions important to actors, such as agent fees, audition costs, research, coaching and classes, and transportation.

“This latest tax bill as written not only doesn’t provide the relief for Equity’s middle class workers, but by raising costs for thousands of artists, puts our entire industry at risk,” said Sandra Karas, the treasurer of the union. The Senate tax bill eliminates the deduction of itemized write-offs as well as the deduction of state and local income taxes. It nearly doubles the size of the standard deduction, from $6,350 to $12,000 for individuals and $12,700 to $24,000 for couples filing jointly.

Some of the Senate tax bill provisions that will benefit studios and media companies include:

Corporate tax rate. Large businesses in general have been pushing for the drop in the corporate rate — arguing that the current 35% is too high, undermines competitiveness, and encourages corporations to locate some of their operations in lower-tax countries.

While companies like Apple and General Electric have rather famously stashed profits overseas to avoid the tax and pay a much lower effective rate, that practice is less pervasive among media companies. In the most recent year, Comcast, Disney, 21st Century Fox, and Sony each paid above a 30% effective rate, or the percentage of federal, state, and local taxes on their profits.

The figures fluctuate from quarter to quarter, year to year, particularly when a company writes down a significant loss or expense. The research firm FactSet calculated the effective rates for the six media companies in their most recently completed fiscal year:

Company Ticker Pre-Tax Income Income Tax Effective Rate
Walt Disney DIS 13788 4422 32.1%
Comcast CMCSA 14353 5308 37.0%
Viacom VIAB 2212 293 13.2%
21st Century Fox FOXA 4689 1419 30.3%
Time Warner TWX 5195 1281 24.7%
Sony* 6758 2324 1146 49.3%

*USD, figures in 000s.

Why don’t these media companies offshore more of their profits? There are a host of reasons, including the risk of locating intellectual property in a lower-tax country that does not have as strict of copyright laws, and the flak that corporations take for locating some of their operations outside of the U.S. Based on the most recent fiscal year, a drop in the federal corporate rate to 20% could save the companies as much as $6 billion. That is a figure based on simple calculation and would be subject to a number of variables based on annual performance.

“Our current system, with its high corporate tax rates and quasi-worldwide approach, is out of balance with the rest of our trading partners,” the MPAA’s Patrick Kilcur wrote to Senate leaders last summer. “To grow the economy and create jobs, a successful tax reform proposal must support innovation and domestic production, in industries like ours. Our member companies are high effective rate taxpayers.”

The companies have argued that a lower rate could boost production in the United States and serve as a disincentive to eventually locate intellectual property overseas, particularly as countries like Great Britain become more aggressive in offering tax incentives and other sweeteners.

But the call for a lower corporate rate has been met with some skepticism, particularly among progressive groups who say that the tendency will be for major companies to just distribute tax savings to shareholders or even executive salaries. A recent video went viral in which Gary Cohn, President Trump’s top economic adviser, appeared at an event before a group of CEOs and the moderator asked who in the crowd planned to increase investment with the lower corporate rate. Only a few hands went up. “Why aren’t the other hands up?” Cohn asked.

AT&T did pledge to invest $1 billion in infrastructure should there be a drop in the corporate rate, a commitment it made earlier this month just as the Department of Justice was giving indications that it would try to block its proposed merger with Time Warner.

Other media companies have not made those specific commitments on hiring, investment, or worker salaries, but some labor groups are pressuring them to do so.

The Communications Workers of America has called on major companies like Verizon, AT&T, NBCUniversal, and ABC to guarantee that CWA members will receive a $4,000 annual wage increase. The CWA was raising skepticism over a claim made by President Trump’s chief economist, Kevin Hassett, who concluded that the average household would see a $4,000 increase in income with the drop of the corporate rate.

In any case, the fact that the Senate and the House versions of tax reform call for a 20% is a big win for industry in general, at a level that is even lower than some expected. Proponents like to point out that such a drop has been a long time coming, albeit Democrats have in the past had their sights on a lesser level of tax cut.

100% Expensing. The Senate bill calls for expensing of 100% of the cost of domestic film, television and theatrical projects. The expensing would be allowed at the time of a film’s release, a TV project’s debut broadcast, or a theatrical show’s first performance. It applies to productions after Sept. 27, 2017.

The caveat, though, is that the provision runs through the end of 2022. An existing deduction for domestic production activities in general also is being eliminated, but industry representatives believe that the tradeoff will be more advantageous.

The 100% expensing also will replace what is known as Section 181, which allowed companies to immediately deduct the first $15 million of certain film and TV production costs. The problem with that provision is that expired every year, and Congress at times would renew it retroactively before letting it lapse at the end of 2016.

A wild card, is whether countries like Great Britain, which have been particularly aggressive in trying to lure U.S. production will merely sweeten their own incentives to retain projects in their country.

Advertising deductibility. One of the more advantageous parts of tax reform for the entertainment industry is what is not in the House of Senate versions of the legislation. That would be to eliminate the deductions for advertising expenses. The argument made by some media companies was that doing away with that deduction would hit them twice, whether as a major advertiser (a film studio), or broadcaster (network) that depends on such revenue.

As lawmakers were devising the outlines of the legislation, the elimination of that deduction was on the table, but it never made it to the actual bills.

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