A trusty way to win in backyard baseball is to change the rules retroactively. Redraw the first base line so a home run becomes a foul ball. After a third missed swing, declare that little kids get four strikes. Announce that a ball hit into the neighbor’s yard is an automatic out.
The Obama Administration and congressional Democrats are pushing their own equally dubious version of retroactive rule-making. They want to limit the ability of companies to escape U.S. taxation by merging with foreign companies—and they want to make the change retroactive to May 8. If they succeed, it would apply to companies such as Medtronic (MDT) and AbbVie (ABBV) which have pending mergers.
These mergers, known as corporate inversions, are a huge drain on the U.S. Treasury, and finding a way to stop them as soon as possible makes sense. Each week that goes by without a fix makes matters worse as more and more companies strike tax-minimizing merger deals. But yanking the tax advantage from deals that have already been lawfully agreed to is a toxic kind of unfairness, even if it’s lawful.
There is a precedent for making tax legislation retroactive, says Michael Graetz, a tax expert at Columbia Law School, but it’s typically happened in cases where the writing was on the wall. For example, if the House passed an anti-inversion bill but the Senate went into recess before taking action, you could argue that companies should have known better than to arrange a merger based on a tax law that was clearly about to change. Even the date of approval by a committee such as the House Ways & Means Committee or the Senate Finance Committee might justifiably be used as a retroactive date for a law change, Graetz says.
But May 8? That’s the publication date of an opinion column in the Wall Street Journal by Senate Finance Committee Chairman Ron Wyden, an Oregon Democrat. That’s writing on the op-ed page, not writing on the wall. Wyden and his colleagues remain far apart on a solution for corporate inversions. Senator Orrin Hatch, the top Republican on the Finance Committee, said at a hearing July 22 that “whatever approach we take, it should not be retroactive or punitive.” Even some Democrats are skeptical of the approach. In interviews with Bloomberg News this week, four Democrats on the committee “declined to back a standalone retroactive tax bill to limit inversions.”
“When the Obama Administration calls for going back to that date, it’s just an effort to create uncertainty,” Graetz says, which will in turn drive up the price of pending deals or give acquirers an escape clause if their tax advantages are taken away. “It’s … a shot across the bow so people will slow down.”
The Founding Fathers didn’t much like retroactivity. Article 3 of Section 9 of the U.S. Constitution says, “No … ex post facto Law shall be passed.” The Heritage Foundation’s online guide to the Constitution quotes Alexander Hamilton in The Federalist Papers: “The subjecting of men to punishment for things which, when they were done, were breaches of no law” is among “the favorite and most formidable instruments of tyranny.”
True, the Supreme Court has ruled that Article 3 applies to criminal law, not civil law. The Treasury Dept. has trotted out several cases of retroactivity in recent civil legislation. In a July 24 blog post, Mark Mazur, the assistant secretary for tax policy, notes that retroactivity was included in an anti-inversion measure “enacted by a Republican Congress in 2004.”
Even if a retroactive bill passes the constitutionality test, it doesn’t pass the smell test. By all means, Congress and the White House should find a fix for Treasury-draining corporate inversions, and soon. But when it comes to undermining lawfully agreed-upon corporate mergers, retroactive is radioactive.