Tax Politics Play a Role, but a Tight Labor Market Is the Real Driver of Wage Growth

Tax Politics Play a Role, but a Tight Labor Market Is the Real Driver of Wage Growth

Since the US Congress passed a major tax reform bill last month, slashing the corporate tax rate from 35 percent to 21 percent, a number of companies have come out with announcements that they were passing some of their tax savings on to their employees in the form of raises, bonuses, or enhanced benefits. Many of these companies framed these decisions as responses to the tax cut, but some also acknowledged that they were planning to increase rewards this year anyway or were parlaying their tax savings into accelerating changes that were already in the works.

The businesses making these announcements are large, high-profile companies that employ substantial numbers of people, so a lot of American workers are seeing the corporate tax cut “trickle down” into their paychecks. In surveys, however, most companies have indicated that their tax savings will go mainly toward investor-focused spending like debt repayment, dividends, and stock buybacks. Also, most of the post-tax-reform rewards employees are getting are one-time bonuses, which don’t commit employers to higher payroll costs in the future as raises do. Companies that handed out bonuses before the new year (or before the start of their fiscal year) had an additional incentive to do so, as they would be able to deduct those bonuses from their taxable income for 2017, subject to the 35 percent rate.

Passing over the thorny politics of whether or not corporate tax cuts are the best way to deliver higher incomes for working families, tax reform is hardly the only motivation these companies have for raising wages or upgrading benefits like paid family and sick leave.

The US labor market has been very tight in the past two years, with unemployment falling to just over 4 percent, and companies in a wide range of industries have been having trouble attracting and retaining talent, even in low-skill, typically high-turnover jobs like retail sales. Major retailers like Walmart and Target were already courting store employees with higher entry-level wages and better benefits, even as they compete with Amazon in the e-commerce market that is becoming increasingly crucial for retailers’ business models. Some companies that have raised wages at the bottom of the payroll are doing so in response to minimum wage increases in various states and cities, but the battle for talent is the fundamental factor putting upward pressure on wages.

That’s not to say the tax cuts don’t have an impact on these decisions. Another element of the strategic calculation inspiring employers to boost their total rewards offerings is the idea of HR as PR: i.e., the realization that customer perceptions and loyalties are now driven in part by how well companies treat their employees. A growing number of consumers are making decisions about where to spend their money based on these ethical perceptions, and are even willing to pay a little more to support socially conscious businesses. Businesses that make a show of spending their tax cuts on wages and benefits are sending a message to customers as well as candidates that they put employees first, while those that don’t run the risk of being perceived or depicted in the media as greedy.

In this case, companies are aiming their HR-as-PR at Washington as well. Corporate America had a rocky relationship with President Donald Trump in his first year in office, and many companies have an incentive to curry favor with the Trump administration. This is especially true for companies that operate in highly regulated industries, have pending business before federal regulators, or have been targets of public criticism from President Trump. By helping the administration improve public perceptions of its tax plan, these companies can pave a smoother path for themselves in their dealings with the federal government.