Major U.S. banks shaved about $21 billion from their tax bills last year — almost double the IRS’s annual budget — as the industry benefited more than many others from the Republican tax overhaul.
By year-end, most of the nation’s largest lenders met or exceeded their initial predictions for tax savings. On average, the banks saw their effective tax rates fall below 19 percent from the roughly 28 percent they paid in 2016. And while the breaks set off a gusher of payouts to shareholders, firms cut thousands of jobs and saw their lending growth slow.
The tally is based on a review of financial results and commentary from the 23 U.S. banks the Federal Reserve deems most important to the nation’s economy in annual stress tests. Banks stood to benefit more from lower tax rates because their effective rates were typically higher than those paid by non-financial companies. In other words, their bills had more room to fall. They’re also among the first industries to post annual results.
While banks vowed to use a portion of their savings to reward employees, help needy communities and support small businesses, the magnitude of their break and how the money was divvied is likely to fuel debate over whether the law was an effective way to stoke the economy. The 23 firms boosted dividends and stock buybacks 23 percent, and they eliminated almost 4,300 jobs. A few have signaled plans to cut thousands more.
The size of the tax savings is especially striking amid the heated debate in Washington over the national budget. The amount saved by banks is greater than NASA’s request for fiscal 2019, which would cover deep space exploration, orbital operations and other research. It’s more than double what the Federal Bureau of Investigation expects to spend fighting crime.
To estimate tax savings, Bloomberg applied tax rates that banks paid in 2016 to their pretax earnings last year. That’s because their rates in 2017 were skewed by billions of dollars in accounting adjustments as the new law took effect. Some banks fined-tuned the adjustments last year, potentially shifting the $21 billion figure by hundreds of millions of dollars.
Here’s a breakdown of how banks’ key constituencies fared after the tax break.
The picture is mixed for staff. As tax cuts took effect, many firms vowed to share a portion of their savings with workers. Bank of America Corp., for example, announced $1,000 bonuses for about 145,000 employees last year. Wells Fargo & Co. was among lenders that boosted their minimum wage to $15 an hour.
Yet headcount at Bank of America dropped by almost 4,900 last year, and at Wells Fargo by about 4,000. The only bank that eliminated more was Citigroup Inc., with 5,000 gone. Banks rarely provide regional breakdowns, but press reports show at least some cuts occurred outside the U.S.
The impact of those reductions on the larger group’s combined workforce was blunted as others hired.
Now, additional cuts are on the horizon: State Street Corp., which added employees last year, announced in January it will dismiss 1,500 people while automating operations. And Citigroup has indicated it may cut thousands of its technology and operations staff in the years ahead.
Tax cuts or not, the financial industry is shifting customers to mobile platforms and embracing new technologies to handle tasks. While lower taxes can ease the pressure to pare personnel costs, a number of firms have noted they’re spending more on automation.
For people who remain, lower taxes may help pad paychecks. Personnel expenses at the 23 banks climbed an average of 3.6 percent last year, a sign that employees got raises. And Bank of America expanded its bonus program this year. Still, the ratio of personnel costs to revenue declined as banks gave workers a smaller slice of the money they brought in.