Corporate Tax Holiday Won’t Find Way Into Year-End Proposal

A proposal for a temporary tax holiday on offshore corporate profits won’t be included in year- end Republican legislation that includes a payroll tax cut extension, according to House Speaker John Boehner.

The measure, which had been stalled for months, emerged as a candidate for inclusion in a payroll tax bill package getting a strong push from House Republicans, particularly a bloc of lawmakers elected in November 2010.

The repatriation initiative, backed by multinational corporations including Pfizer Inc. (PFE), Brown-Forman Corp. and Eastman Kodak Co. (EK), would let U.S. companies bring home offshore earnings at a 5.25 percent tax rate, an 85 percent discount from the 35 percent top corporate rate.

Boehner said today that the repatriation initiative wouldn’t be part of legislation to extend a payroll tax cut in 2012.

Supporters including Representative Kevin Brady, a Texas Republican who has sponsored tax holiday legislation, say a tax holiday would encourage companies to invest money in the U.S. instead of offshore and would stimulate the economy.

Many Democrats oppose a tax holiday, however, and key Republicans, including Representative Dave Camp, of Michigan, head of the tax-writing Ways and Means Committee, are cool to the idea of a stand-alone repatriation program.

‘Take Another Look’

Camp has advocated addressing a tax holiday in the context of broader changes to the tax code.

“We are hopeful that the congressional leadership will take another look before closing the door on $1 trillion,” Doug Thornell, spokesman for the WIN America Campaign, a group of multinational companies lobbying for a tax holiday, said in an e-mailed statement this afternoon.

The WIN America group, which includes Microsoft Corp. (MSFT), Apple Inc. (AAPL) and Pfizer Inc., says a tax holiday is needed because U.S. corporations are taxed at higher rates than their overseas rivals. Up to $1 trillion would be injected into the U.S. economy if a temporary tax holiday was enacted, the group says on its website.

Not all multinational companies embraced the tax holiday.

“Repatriation, singularly, is not helpful,” Wayne Monfries, chief tax officer of Beaverton, Oregon-based Nike Inc. (NKE), said yesterday at a briefing sponsored by the RATE Coalition, a group of companies lobbying for lower corporate tax rates. “I think we have to have corporate tax reform, and repatriation should be part of corporate tax reform.”

President Barack Obama opposes a stand-alone repatriation holiday in part because he wants taxation of overseas profits to be addressed in a broader tax-code overhaul.

2004 Holiday

Congressional Democrats opposed to the proposal, including Senator Carl Levin of Michigan, have said companies used money from a 2004 repatriation program for stock buybacks and dividend payments and in some cases eliminated jobs.

The non-partisan Congressional Budget Office ranked repatriated overseas earnings last among 13 stimulus policy options it evaluated in a Nov. 15 report.

Hopes for a repatriation holiday rose earlier this week, after New Hampshire freshman Representative Frank Guinta released a letter from 52 of 87 House Republicans elected in November 2010 urging Boehner and other Republican leaders urging them “to consider repatriation tax policy, this session, to stimulate the economy and get Americans back to work.”

U.S. Investment

Brady introduced his bill in May. Similar legislation in the Senate was unveiled in October by Kay Hagan, a North Carolina Democrat, and John McCain, an Arizona Republican.

One reason for resistance among some lawmakers is the projected cost of a tax holiday. The congressional Joint Committee on Taxation reported in May that the proposal would cost the U.S. Treasury an estimated $78.7 billion in forgone revenue over a decade.

Repatriation supporters dispute the congressional tax committee’s conclusion and point to another study that predicts economic benefits from a tax holiday.

The congressional panel projected the revenue loss over a decade because researchers expect companies would keep money offshore in anticipation of another round of tax breaks.

Payroll Tax Extension

The task of passing a repatriation measure this year is tough because the only legislative vehicle left for it is the payroll tax extension, which benefits primarily low- and moderate-income taxpayers, said John Buckley, a former House Democratic tax counsel who now teaches at Georgetown University in Washington.

“Can you imagine saying that you would hold up the payroll tax cut extension for that?” Buckley said in a phone interview. “If I were Barack Obama, I would say, ‘Make my day.’”

Passing a tax holiday as a stand-alone measure also would complicate efforts toward a comprehensive overhaul of the tax code, according to Representative Richard Neal, a Massachusetts Democrat who sits on the tax-writing Ways and Means Committee.

“If you give up now and accept what might be a short-term bonanza or holiday, it’s going to be far harder to get tax reform,” Neal said.

Douglas Holtz-Eakin, an adviser to McCain’s 2008 presidential campaign and former director of the Congressional Budget Office, said it would be unwise to wait until 2012, an election year, to try to pass repatriation legislation.

Political Perspective

“From a political perspective, I don’t think it’s impossible to do next year, but you have to be realistic. There’s a big agenda next year,” Holtz-Eakin said in a Dec. 1 conference call with reporters. “Putting this into that mix is simply unwise. We should get it done now.”

Clint Stretch, managing principal of tax policy for Deloitte Tax Partners, said it’s unlikely that Congress would pass a tax holiday in 2012 if the initiative doesn’t advance this year. Conventional wisdom is that Congress will avoid addressing contentious issues in a presidential election year, Stretch said.

“But if that stops working for them politically, they can change, so there’s some small chance,” Stretch said. “Nothing’s ever completely dead in politics.”

The bills are HB 1834 and S 1671.

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net

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

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