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Tax Reform Shows Early Signs Of SMB Bank Lending Impact

U.S. tax reform led to much chatter and some confusion about exactly how changes would impact the nation’s small businesses (SMBs). Last month, the U.S. Department of Treasury finalized rules that apply to SMBs on qualifying for a 20 percent tax deduction, with the National Federation of Independent Business (NFIB) applauding the initiative.

“The vast majority of small businesses will enjoy the benefits of the full 20 percent deduction,” said NFIB Senior Vice President of Public Policy and Advocacy Brad Close in an interview with The New York Times in January.

However, the impact of the tax reform on the small business community is not clear, particularly so soon after the reform came into effect. Last October, for example, data from ZipBooks found that tax reform did not lead to an increase in small business hiring.

“We asked, ‘What effect on your hiring plans has the Tax Cuts and Jobs Act had?’” said ZipBooks Co-Founder and Chief Operating Officer Jaren Nichols in a statement announcing research at the time. “The overwhelming response was ‘none at all.’”

Now, there is another debate emerging over how tax reform might impact small businesses beyond any direct tax cuts they may receive.

Reports in Bloomberg on Wednesday (Feb. 6) said an examination of the largest banks’ tax savings found that most met or exceeded their expectations, saving a combined $21 billion from their tax bills in 2018. Big banks saw tax rates fall to an average of below 19 percent that compares to the 28 percent they paid in 2016, reports noted.

Bank of America paid an 18.6 percent tax rate, while Citigroup saw a 22.8 percent rate. Goldman Sachs, which had anticipated a tax rate of 24 percent, paid 16.2 percent. Morgan Stanley paid 20.9 percent, while JPMorgan Chase and Wells Fargo emerged as the only two of the top six U.S. banks to have paid a higher tax rate than they initially expected.

Bloomberg noted that it used 2016 tax rates to compare what banks paid last year, due to the accounting adjustments that financial institutions (FIs) applied in 2017 as a result of tax reform taking effect.

While FIs vowed to use those savings for a variety of measures, such as increasing small business lending, reports said lending growth has actually slowed since the implementation of the tax reform. Overall, the top banks saw lending grow by 2.3 percent in 2018, compared to a 3.6 percent growth rate in 2017.

JPMorgan Chase and Wells Fargo were among the largest banks that vowed to enhance small business financing operations supported by the new tax legislation. JPMorgan announced a $20 billion package last year to increase small business lending by $4 billion, open new branches, increase home lending and more.

Data from Biz2Credit has shown a steady increase in big banks’ small business loan approval rates since January 2018, with an approval rate of 27 percent as of December 2018.

Too Early To Tell

Analysts warned, however, that it is too soon to tell exactly how big banks’ tax cuts impacted corporate and small business lending, or the national economy as a whole.

Slower loan growth, for example, could be due to declining demand for financing amid higher interest rates. The tax reform also provided tax cuts to corporates, freeing up capital and lessening their demand for external financing. Commercial and industrial lending accelerated among the top 25 banks in the U.S. toward the end of 2017, suggesting that tax reform propelled this area of banks’ loan books.

“One year is simply not enough time to assess the full economic impact of major business tax reform on the banking sector, much less on the entire U.S. economy,” said Jeff Sigmund, spokesperson for the American Bankers Association (ABA), to Bloomberg. “The tax bill created positive incentives for businesses across the country to expand, but the timing and full economic impact will take many years to observe.”

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