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Trump tax cuts will be smaller than expected for many companies

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Opponents of the new corporate tax cuts were right. Many companies didn’t pay the full rate before the law passed—so they won’t see splashy reductions in 2018, according to their own estimates.

The law signed Dec. 22 by President Donald Trump lowered corporate taxes 14 percentage points, to 21 percent from 35 percent. The 24 S&P 500 companies that have shared 2018 guidance with investors are projecting an average savings of 5 percentage points.

Many U.S. companies already paid less than the 35 percent because they stashed profits overseas in lower-tax jurisdictions. The new law, passed by congressional Republicans without any support from Democrats, limits certain deductions on debt interest and executive compensation, said Thomas Holly, a PricewaterhouseCoopers partner in Washington.

“Essentially, you’re not getting as many deductions, and those can drive your rate up,” Holly said.

The new law adds almost $1.5 trillion to the U.S. government’s deficit over 10 years—before accounting for economic growth or other macroeconomic changes that might result. Corporations love it. A vast majority will pay less in taxes, and unlike tax cuts for individual Americans, the provisions don’t expire.

Financial firms, despite taking billions in tax hits in the fourth quarter to account for repatriating overseas profits and the revaluation of deferred tax assets, will still enjoy lower rates this year.

Financial Firms

Among financial firms in the S&P 500 that have provided guidance on their 2018 effective tax rate, Wells Fargo & Co. said it will see its rate fall the most, by 10 percentage points. Bank of America Corp. and Regions Financial Corp. said they’ll pay about 9 percentage points less. American Express Co. said it’ll save 8 percentage points and the reduction for Bank of New York Mellon Corp. will be 3.4 percentage points. Only State Street Corp. said it expects to pay a higher rate in 2018.

International Business Machines Corp. said it’s also estimating a higher rate in 2018. Chief Financial Officer Jim Kavanaugh called taxes a hindrance during the company’s fourth-quarter earnings call.

“The ones that are in a materially worse position are going to be a very small minority,” said Standard and Poor’s Global Ratings health-care analyst David Kaplan.

Bloomberg News