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Free Money Claim Roils Clash on One-Time Offshore Tax Break

The fate of a proposed tax holiday on repatriating offshore profits could turn on whether the idea would lead to a deluge of money into the U.S. Treasury -- or out of it.

Backers, including such companies as Adobe Systems Inc. (ADBE), Cisco Systems Inc. (CSCO) and Pfizer Inc. (PFE), say bringing home more than $1 trillion in profits that companies have parked outside the U.S. would yield a windfall for the federal government.

“If we can bring this money back and if it gets reinvested in the economy, $1 trillion is a real shot in the arm for the economy,” Jim Rogers, president, chairman and chief executive officer of Duke Energy Corp. (DUK), said in an interview today. Without a tax break, he said, Duke would use some of the $1.2 billion it has invested outside the U.S. for projects in Peru or Brazil.

The official nonpartisan scorekeeper for Congress thinks some of the money will come home without a holiday, and it labels the proposal a corporate tax cut. The Joint Committee on Taxation estimates that companies would take advantage of a holiday by accelerating future repatriations and shifting more profit offshore with the expectation that Congress would again offer a tax discount.

“These taxpayers that are affected are not urging this because they’re going to end up paying more in taxes,” said George Yin, a former chief of staff of the Joint Committee on Taxation who is a law professor at the University of Virginia. “They’re urging this because it’s going to reduce their taxes.”

Short-Term Gain

The committee estimated that a tax holiday would generate a short-term revenue gain of $25.5 billion between now and 2013, and cost $78.7 billion over the next decade. Because lawmakers are so focused on the federal budget deficit, a corporate tax cut may be tougher to advance than a policy that generates new money.

“A bad score creates a real challenge,” said former U.S. Representative Phil English, a Pennsylvania Republican who is a senior government relations adviser at Arent Fox LLP in Washington. “If a score like this suggests significant revenue loss, then that becomes a rhetorical hedge against it that can be used in not just debates in Congress but also in subsequent political fallout.”

The repatriation proposal, introduced by Representative Kevin Brady of Texas on May 11, has support from at least three House Democrats and from former labor-union leader Andrew Stern. The Obama administration opposes a tax holiday, because it says the benefits of a similar proposal enacted in 2004 flowed to relatively few companies. Also, the administration maintains the holiday would weaken momentum for an overhaul of the tax code.

One-Time Holiday

The debate over the estimate hinges on projections of how companies would respond to a one-time repatriation opportunity in the context of the U.S. international tax system. The estimate, released by Representative Lloyd Doggett, a Texas Democrat and repatriation opponent, analyzes a proposal similar to the 2004 holiday, not Brady’s bill.

Unlike most other industrialized countries, the U.S. taxes worldwide profits earned by U.S.-based companies. Corporations receive tax credits for payments to other governments, and can defer the residual U.S. tax until they bring home the profits.

Those features can encourage companies to park investments and profits outside the U.S. Adobe, Cisco and Pfizer currently have $1.9 billion, $31.6 billion and $48.2 billion, respectively, in other countries.

Supporters of a repatriation holiday say companies won’t bring money home if required to pay the difference between tax rates in other countries and the 35 percent U.S. statutory rate.

‘Double-Taxed’

“There is a universal assumption by the government scorers that a substantial amount of the revenue that is effectively double-taxed will eventually find its way back on shore,” said English, who helped write the 2004 bill. “That’s not been the experience.”

Without an incentive, “companies are never going to repatriate the money,” said Allen Sinai, chief global economist of Decision Economics Inc., a research firm in New York. “It’s going to stay overseas permanently. On a one-time repatriation, the Treasury will get money.”

Just because the government would garner some revenue through a tax holiday doesn’t make it a net winner for the Treasury. The costs of proposals are measured against a baseline revenue estimate that assumes no policy changes.

That requires scorekeepers to calculate two scenarios. Even in hindsight, the inability to examine what would have happened without the previous holiday makes it difficult to measure the accuracy of the 2004 projection that it would cost $3.3 billion.

Committee Estimates

The joint committee estimated that in 2004 companies would repatriate $235 billion, not the $312 billion in profits they eventually brought back to the U.S. that qualified for the tax break. This time, the joint committee estimates that companies would bring home about $700 billion if offered the same 5.25 percent rate.

Congressional scorekeepers highlight the fact that companies repatriate money every year -- $104.5 billion in 2008 -- as evidence that the government already takes in revenue from offshore profits. Their analysis suggests that companies would accelerate those repatriations if offered the holiday.

Robert Shapiro, chairman of the economic consulting firm Sonecon LLC in Washington, said the pace of repatriations suggests that companies didn’t accelerate plans to repatriate money during the previous holiday. If that were true, he said, the pace of profits sent home since would have plummeted.

Normal Levels

“Yes, there is this big jump in repatriations in the period of the tax preference, but repatriations then returned to normal levels, not depressed levels,” said Shapiro, who oversaw economic policy in the U.S. Commerce Department under President Bill Clinton.

In examining those steady repatriations and the accumulating amounts of money overseas, the joint committee sees evidence that companies will need to bring money home over the next decade, even at higher tax rates.

“It’s quite remarkable how quickly and how much permanently reinvested earnings have accumulated again,” Yin said.

That thinking ignores the investment opportunities that companies have outside the U.S. and shareholders’ demands for higher rates of return, said former Representative Jim McCrery, a Louisiana Republican who is a lobbyist for the companies seeking the repatriation holiday.

‘At the Margin’

“At the margin, that cash is going to go to that investment overseas, because it doesn’t face another level of taxation,” he said.

JCT officials use economic models and corporate tax returns to make their projections. They don’t consider the time value of money, and they operate within constraints that don’t let them assume tax policies can help expand the economy. The estimate provided to Doggett said studies of the previous holiday found “little macroeconomic benefit.”

The lack of what’s called dynamic scoring means that those models miss the economic benefits of repatriation, said Sinai.

If a repatriation holiday occurs, scorekeepers project that corporations would shift even more investments and profits outside the U.S. in anticipation of another tax holiday.

That would create a territorial tax system in which profits earned outside the U.S. are exempt from taxation, without the safeguards other countries use to discourage shifting of profits or investment, said Edward Kleinbard, a former joint tax committee chief of staff who is a law professor at the University of Southern California.

“What the estimate essentially reflects, as an outsider, is the idea that if Congress were to enact this one-time only repatriation for a second time, firms will anticipate that there will be a third and fourth and a fifth time,” he said.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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