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Repatriation Tax Holiday Google Backs Raises Cost Concerns

Representative Kevin Brady
Representative Kevin Brady introduced legislation that would give U.S. companies one year to bring home at a lower tax rate as much as $1 trillion in profits parked overseas. Photographer: Andrew Harrer/Bloomberg

A fresh legislative effort to allow companies to return profits to the U.S. at a lower tax rate will likely run into the same problems that have dogged repatriation advocates in recent years: its cost and the lack of guarantees that it will create jobs.

Repatriation legislation introduced yesterday by Representative Kevin Brady, a Texas Republican, repeats most of a 2004 law. It would allow U.S.-based companies to repatriate, for one year, income earned overseas at a 5.25 percent rate instead of the 35 percent statutory corporate rate. The money that would flow to the U.S. -- estimated to be as much as $1 trillion -- would spur job creation and investment, Brady maintains.

“This is about creating jobs, expanding U.S. businesses and strengthening American companies,” he said yesterday in a statement yesterday about the bill, which was introduced with some Democratic support.

Companies including Microsoft Corp., Devon Energy Corp., Cisco Systems Inc. and Brown-Forman Corp. are part of a coalition lobbying for a repatriation holiday. The House Ways and Means Committee will hold a hearing today that will focus on how tax rules affect global competition.

Estimated Cost

Democrats are countering Brady’s proposal with estimates of the growing cost of a repatriation effort. Representative Lloyd Doggett, a Texas Democrat who is a senior member of the Ways and Means Committee, yesterday circulated an estimate from the Joint Committee on Taxation pegging the cost of a repatriation bill at $78.7 billion. An unsuccessful effort to create a similar holiday in 2009 would have cost the U.S. government about $30 billion over a decade in forgone revenue.

“This means we will have to borrow more from foreign creditors or shift a greater burden to American small businesses and families,” Doggett said. Congressional estimators projected that companies would repatriate about $700 billion if offered a 5.25 percent rate, compared with $300 billion during the tax holiday enacted in 2004.

The estimate released by Doggett considers a general repatriation holiday and not the legislation introduced by Brady, who said he is seeking a review from the Congressional Budget Office. Brady downplayed the earlier estimates.

“I don’t think that score passes the common-sense test,” he told reporters on a conference call yesterday.

Democrats also maintain that the bill does too little to protect jobs at companies that repatriate overseas funds. They have pointed to such examples as Hewlett-Packard Co., which returned $14.5 billion to the U.S. at a low rate in 2004 and cut its workforce by 14,500 employees in 2005.

Layoff ‘Disincentive’

The bill includes what Brady calls a “disincentive” for layoffs, as it would penalize companies that bring home profits at a lower rate and then reduce their workforce. Companies would have to add $25,000 to their taxable income each time they cut their total workforce below the company’s average.

With a 35 percent tax rate, the provision would increase the company’s tax bill by $8,750 for each job cut. Edward Kleinbard, a professor at the University of Southern California School of Law in Los Angeles, said that won’t be enough to discourage layoffs.

“It’s not a huge amount at all,” he said. “It’s just misguided.”

Brady defended the provision as “reasonable” and said it “makes the point that our goal is to create jobs and strengthen jobs.”

Using the Money

He said he didn’t consider restrictions on how companies could use the money they bring back to the U.S., leaving open the possibility for businesses to use the funds to pay for dividends or stock buybacks. Companies were criticized for such tactics after the 2004 law was passed.

“It would be a mistake for Washington to create artificial restrictions on the use of this when clearly the aggregate of this investment is going to be very good for the economy,” Brady said.

The bill faces obstacles in Congress. House Majority Leader Eric Cantor, a Virginia Republican, supports a repatriation bill, while House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, has said he wants to address the issue as part of a comprehensive revision of the tax code. Treasury Secretary Timothy Geithner has echoed Camp’s view.

Camp said today in a brief interview that “I’m for repatriation, but I’m interested in comprehensive tax reform.”

He declined to say whether he would support the repatriation proposal as standalone legislation if a tax overhaul plan does not materialize in Congress.

‘Interim Step’

Cantor expressed support yesterday for considering a repatriation proposal before a tax overhaul.

“While fundamental reform will take time, repatriation is an interim step that we can take to encourage businesses to bring investment back to our country,” he said in a statement.

The repatriation issue has received less attention in the Senate. The Obama administration opposes a repatriation holiday.

Critics say the 2004 law didn’t lead to enough job creation to justify the tax break.

“It was a major failure the first time around, and it’s going to be worse this time,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a Washington organization that supports policies that help low-income Americans. “You make it a regular occurrence, you make it an incentive to shift profits and investments overseas.”

Brady introduced the bill with at least three Democratic co-sponsors, Representatives Jim Cooper of Tennessee, Jim Matheson of Utah and Jared Polis of Colorado.

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