U.S. Tax Holiday Penalties Do Little to Discourage Job Cuts

Companies pressing for a tax holiday on overseas profits are unlikely to make staffing decisions based on penalties aimed at discouraging job cuts, economists and policy experts say.

Momentum for a repatriation holiday has grown in recent weeks with Senators Kay Hagan, a North Carolina Democrat, and John McCain, an Arizona Republican, joining to introduce legislation earlier this month. Senators Charles Schumer, a New York Democrat, and Mark Kirk, an Illinois Republican, are working on a separate repatriation measure.

With the unemployment rate stuck at 9.1 percent, repatriation proposals will face scrutiny on the jobs issue. Opponents of a tax holiday, including Democratic Senator Carl Levin of Michigan, have complained that companies used proceeds of a 2004 tax holiday to buy back stock and then cut jobs. Hewlett-Packard Co. (HPQ) returned $14.5 billion to the U.S. at a 5.25 percent rate after the 2004 holiday and reduced its workforce by 14,500 employees within a year.

Lawmakers backing tax-holiday bills are seeking to blunt this criticism by proposing penalties for companies that reduce their workforces after repatriating profits. Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania, said none of the penalties being considered would prevent companies from eliminating positions.

“I don’t think they’ll be particularly effective,” he said. “There are all kinds of ways around policies like this.”

Fines for Companies

The legislation introduced by Hagan and McCain would require companies to add $75,000 to their gross income for every position cut in the two years after repatriating offshore profits. For a company that pays the top 35 percent corporate rate on its taxable income and doesn’t claim deductions that would cancel out portions of the penalty, the provision amounts to a $26,250 fine.

A bill from Representative Kevin Brady, a Texas Republican who sits on the House Ways and Means Committee, would require companies to increase their taxable income by $25,000 for each staff cut in the two years after repatriating profits in a tax holiday. Assuming a 35 percent corporate rate, that works out to $8,750 in additional taxes for every eliminated position.

Bipartisan Support

Both bills were designed to secure some bipartisan support.

Companies including Google Inc. (GOOG), Pfizer Inc. (PFE) and Cisco Systems Inc. (CSCO) have formed a lobbying coalition, called the WIN America Campaign, which has backed the Hagan and Brady bills with the penalties included.

“The goal of the legislation is simple: bring back as much overseas money as possible so that it can be invested here in America’s economy, not our foreign competitors’,” said Doug Thornell, a spokesman for the coalition.

Curtis Dubay, a senior tax policy analyst at the Heritage Foundation, a Washington organization that supports limited government, said these kinds of penalties aren’t sizable enough to influence corporate decision-making.

“These provisions are put into bills to give members of Congress political cover for when these things go badly,” said Dubay, who has written studies opposing a tax holiday. “There’s absolutely no way to require that businesses bringing money back use it for jobs. Money is fungible and you can’t get around that basic fact.”

Mary Hanley, Hagan’s communications director, said the legislation “contains stiff penalties.”

“Senator Hagan looked carefully at how to improve upon past repatriation efforts,” she said in an e-mailed statement. “Senator Hagan believes the penalty included in her bill is a strong disincentive for layoffs.”

Deterring Layoffs

In an Oct. 14 telephone interview, Brady said he couldn’t be sure that his penalty would deter staffing cuts at companies that take advantage of a holiday.

“Repatriation alone doesn’t change the marketplace,” he said. “Companies can create jobs and sometimes they have to shed jobs.”

Schumer hasn’t said whether he would include such penalties in a repatriation proposal. Representative Brian Bilbray, a California Republican, introduced repatriation legislation in March that didn’t include any penalty for staff reductions.

Territorial System

House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, said yesterday that he will “soon” introduce legislation to shift the U.S. to a territorial system of taxing overseas profits. That effort, which could permanently exempt most or all offshore income from taxation, could complicate efforts to advance proposals for a tax holiday.

Mississippi Governor Haley Barbour, a Republican who is pressing for a tax holiday as a tool to boost job creation, said he would prefer that Congress limit the use of repatriated funds instead of adding penalties. In a telephone interview today, he said lawmakers could prevent companies from using repatriated profits to pay dividends for a specified period after they return the money to the U.S.

“We could give them a moratorium and say they have a period of time -- let’s say 18 months -- to spend the trillions on capital improvements, equipment, adding employees or increasing benefits for employees,” he said.

Over the long term, Barbour said he hopes the U.S. will move to a territorial tax system without rules on how companies deploy offshore cash.

Focus on Incentives

Anthony Sanders, a professor of finance at George Mason University in Fairfax, Virginia, said lawmakers should focus more on providing companies with incentives for hiring rather than penalties for cutting jobs after repatriating profits.

Hagan’s bill, for instance, allows companies to bring home overseas income at an 8.75 percent tax rate. The rate could be lowered to 5.25 percent if a company’s domestic payroll expands during 2012. Representative Shelley Berkley, a Nevada Democrat, has said she may propose legislation that would contain a 25 percent rate for repatriated profits. The rate would drop to as low as 5.25 percent if a company’s payroll grew by 14 percent.

“Having a positive mechanism is a better way to get at the issue,” Sanders said. “Corporate accountants are going to be very effective at finding ways to get around government mandates and penalties.”

All the attention to what a tax holiday would mean for jobs is missing a larger point, said Douglas Holtz-Eakin, an adviser to McCain’s 2008 presidential campaign and former director of the Congressional Budget Office. He maintains that a holiday that would encourage companies to bring home billions of dollars in profits will aid the economy in any case.

“You shouldn’t judge the success of repatriation by the behavior of the firms,” he said. “If you have a firm that repatriates profits and makes new investments, buys back some shares, that cash still flows into the economy somewhere.”

The Hagan bill is S 1671, the Brady bill is HR 1834 and the Bilbray bill is HR 1036.

To contact the reporter on this story: Steven Sloan in Washington at ssloan7@bloomberg.net

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

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