The New Tax Law and Its Impact on Mobility

NuCompass Chairman, Frank Patitucci, has written the following thought-leadership article on the new tax laws and the immediate and longer term impact on relocation and mobility services:

THE NEW TAX LAW AND ITS IMPACT ON MOBILITY

The new tax law will definitely have an impact on mobility. We just don’t yet know exactly how or when. In this paper we take a look at some of the possible outcomes. First, we will clarify what this law does. Next, we will look at the immediate impacts. And, last, we will engage in some educated speculation about intermediate and longer-term changes.

The New Law

Basically this law eliminates the long-standing income tax exemption for the costs of household goods (HHG) shipping and final travel to a new job location. Reimbursements for such costs are now considered income to the employee. These costs now become like all other relocation costs that are reimbursed by an employer, they are taxable and require withholding. The only remaining exception to this rule is a “tax-protected” home sale transaction, which was not impacted by the law.

Depending on the circumstances of a specific move, these two expenses can represent 25% to 75% of the cost of a relocation. If a company now chooses to gross-up these costs to cover the taxes, it will increase the cost of each of these items by about 50% on average, and increase the total cost of each relocation by a minimum of 10%, to as much as 40%.

Immediate Impact

Higher relocation costs:  One of two things will happen immediately. If the employer chooses to gross up: relocation will become more expensive. If the employer chooses not to gross up: relocating employees will be left with the difficult choice of cutting back on services, or increasing their out-of-pocket expenditures. Indications are that most employers will gross up these expenses, at least initially.

Corporate tax savings:  Importantly, the rationale for paying the increased costs is based on one of the goals of the law itself. The law gives employers a significant reduction in their Federal income tax rates, in exchange for closing “loopholes” like the HHG cost exclusions. In other words, employers should have plenty of money from reduced taxes to pay the additional gross-up costs.

Longer Term

In the longer term, meaning the next one to three years, we could see the impact of this new law in many areas.

Greater emphasis on cost control:  It won’t take long for employers to forget the “corporate tax savings” rationale described above. We can expect that very soon the people we work with will be focusing with great fervor on controlling and reducing costs. 

More use of Lump Sums: It is already popular for many employers to give an employee a relocation bonus or “lump sum” to spend on their move, with little or no policy restrictions. Under the old tax law, there was a tax-saving incentive to directly pay for HHG costs. This is no longer the case, and the use of lump sums is likely to increase.

Fewer relocations:  Econ 101 tells us that when prices goes up, volume goes down. There is no reason to expect that this won’t be the case with relocations. Since relocations are now more expensive, the numbers will decrease.

Better relocation decisions:  We have always advocated that employers make informed relocation decisions, where the employee, HR and hiring manager, all agree on costs and terms, before the relocation is authorized. This process will become even more important in the future. The result may actually be better relocation decisions, meaning that those relocations that don’t make economic sense will not go forward.

More fungible assistance: Now that there are no tax implications for how money is spent by the relocating employee, and to give employees the flexibility they demand, relocation policies will become more flexible. Within an overall budget cap, employees will be able move money from one category to another without approval.

Changes in HHG services:  The component of relocation costs most impacted by the new law is HHG shipping. If employers “gross-up” this cost, as most eventually will, then we can expect program and policy changes to occur in two directions: (1) adoption of alternative approaches for dealing with HHG, such as smaller shipments, crating, containerizing, self-packing, self-moving, etc.; and (2) replacement of fixed-price, tariff based contracts with competitive bidding on each move.

HHG industry involvement in corporate relocation: The HHG industry is already stressed with rising operating costs, severe seasonality, and the inability to attract new drivers. This law just adds to these problems.  Now that there are no tax advantages associated with HHG shipments for employee relocations, will these companies back away from this line of business? What is the new value proposition if servicing the corporate client is no different from servicing the ordinary consumer?

We need to learn more

As I said at the beginning, we don’t know yet how this new law will play out for our industry. The good news is that historically we have weathered such storms and come out the other side better than ever. I suspect that this will be the case with this new law as well. However, in the process, we can expect to have a bumpy ride and most likely see some unanticipated outcomes. Stand by.