H&R Block Inc. (HRB) finds itself one of the more unlikely targets of Donald Trump’s rhetorical wrath, as the Republican presidential frontrunner repeatedly insists he’d like to simplify the federal tax code so radically that the tax-preparation firm would be run out of business.
The dream of stripping complexity from tax rules is nothing new, and Steve Forbes has been promoting for at least two decades a flat tax that would permit one-page tax returns.
Yet in the real world, the U.S. tax code remains a sticky web of multiple brackets and myriad exemptions, deductions and credits.
Last tax season, H&R Block handled one in every seven federal returns, with a 17% market share in assisted returns, while its software was used by about 12% of taxpayers filing with digital returns.
Inherent in Trump’s position, of course, is the idea that H&R Block and its peers are important beneficiaries of numbing tax-code complexity, and therefore opponents of simplification.
Bill Cobb, CEO of H&R Block, denies this. In the attached video, he says, “We don’t have a vested interest in making [taxes] complicated. I think the core issue is that Congress has established social programs that will be administered through the tax code, including child care credits, dependent care credits, the Affordable Care Act, [and] education credits. Congress doesn’t have any good way to administer these programs except the once-a-year tax return."
“So when we say, ‘We love complexity,’ well, we have to train on all this because we have to do an accurate tax return,” Cobb insists.
That said, he professes an interest in promoting sensible efforts to rationalize tax law. “Right now, in the tax code, there are five different definitions of a child. It’s a little silly.”
If there were a real push to undo some of the silliness, Cobb says, “We stand ready to help, because we know this business well. And it would actually help us a little bit with our tax pros to not have it so complicated.”
The Kansas City-based company did sustain some criticism recently for quite a separate set of efforts to influence tax rules. Media coverage last month focused on its role in advocating for changes that could make it more complicated for self-filers to establish eligibility for the Earned Income Tax Credit.
The company states that it is merely trying to place do-it-yourself EITC filers on par with those who use tax preparers, who must use a more complex form. Block also says it is trying to help reduce the volume of fraudulent EITC payouts, which the U.S. Treasury itself has estimated at some $16 billion to $19 billion a year.
There are, of course, many highly uncertain steps between the current situation and any comprehensive retooling of how taxes are administered. And the stock market is certainly not betraying much concern that H&R Block’s business is in jeopardy of going away.
Its shares were among the very few trading near an all-time high this week amid a broad market correction, after the company reported a smaller-than-expected fiscal first-quarter loss, a long-awaited sale of its banking unit and a $3.5 billion stock buyback. It has launched a “Dutch tender offer” for $1.5 billion of stock to get the buyback started in one big bite.
No longer being regulated as a savings-and-loan holding company will allow the firm to have a more efficient balance sheet.
Cobb says: “We had a lot of trapped capital, excess capital on our balance sheet. We did promise our investors that we would return that capital and that’s what we’re doing.”
H&R Block shares jumped 7.5% Wednesday when the new capital plan was revealed. The stock is up nearly 22% since the company was featured here as a strong comeback story in late 2013. That compares to a 5% rise in the Standard & Poor’s 500 index.
With at least sixteen months until a President Trump could even begin to make good on any campaign promises, H&R Block is gearing up as usual for tax season. And it stands to be another confusing one, to hear Cobb tell it:
“There will be more complications this year with the Affordable Care Act. Everyone’s going to be getting along with their W-2 what’s called a 1095-B or –C, indicating they have healthcare. That will have to be documented. The penalties are going up. There are a lot more people in the exchanges," he says.
“But all of the money we put into training last year I think is going to pay off for us.”
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