Bloomberg News

Senate Report Says ‘Failed’ Tax Holiday Shouldn’t Get Repeat

October 11, 2011

(Updates with comments from Hatch starting in the 25th paragraph.)

Oct. 11 (Bloomberg) -- A report from U.S. Senator Carl Levin calls a tax holiday for repatriated offshore profits a failed policy that shouldn’t be repeated.

The report, released late yesterday, is based on publicly available data and surveys of 20 companies that show they repurchased stock and raised executive compensation after a 2004 tax holiday rather than increasing research spending or adding jobs.

“It has the opposite effect of what we really need in this country, which is job creation,” Levin said this morning at a press briefing. “It’s also unfair to the 96 or 97 percent of the companies who keep their operations here.”

Levin said the push for repatriation is part of a pattern of “preference for the few at the expense of the many” in the tax code and public policy that is fueling public anger and frustration reflected in the Wall Street demonstrations and other protests.

Levin said the report found that after bringing back to the U.S. more than $150 billion in 2004 at the lower tax rate, the top 15 repatriating corporations reduced their overall workforces by more than 20,000 jobs.

Job Cuts

The reductions occurred from 2004 to 2007 and included cuts at Pfizer Inc., International Business Machines Corp. and DuPont Co., according to the report.

“The U.S. Treasury lost out on billions of dollars in tax revenues with no evidence of the benefits that it expected to receive in exchange for the loss,” the report said.

The report recommended against another tax holiday on offshore profits because of “the harms associated with a substantial revenue loss, failed jobs stimulus and added incentive for U.S. corporations to move jobs and investment offshore.”

Levin, a Michigan Democrat, and Senator Kent Conrad, a North Dakota Democrat, cited the report in a letter dated today urging the deficit-reduction supercommittee to refrain from supporting a repatriation tax break.

The supercommittee is charged with identifying $1.5 trillion in budget cuts by Nov. 23.

Earlier this year, the Senate Permanent Subcommittee on Investigations led by Levin sent letters to companies, including Dupont and Cisco Systems Inc., inquiring as to where and how they have invested offshore cash and how they plan to spend it if was repatriated.

The new report doesn’t address those issues.

Lobbying Efforts

Levin released the report as other lawmakers are trying to build support for a repeat of the 2004 tax holiday. Last week, Democratic Senator Kay Hagan of North Carolina and Republican John McCain of Arizona proposed letting companies return offshore profits at a top tax rate of 8.75 percent, compared with the 35 percent statutory rate.

Companies such as Pfizer, Google Inc. and Cisco have been lobbying Congress for a tax holiday, contending that could unlock more than $1 trillion in profits that are held offshore. They say bringing home the profits at a low rate would spur hiring.

Under U.S. tax law, multinational companies owe federal income taxes on their worldwide profits. They receive tax credits for foreign taxes paid and can defer U.S. taxation until they bring the profits home.

Levin’s report focuses on what happened after Congress enacted a repatriation tax holiday in 2004 and offered companies a 5.25 percent tax rate. According to the Internal Revenue Service, companies brought back $312 billion that qualified for the preferential rate.

Job Growth

According to the report, only two companies -- Oracle Corp. and Microsoft Corp. -- said the money they repatriated to the U.S. contributed to job growth.

Levin said Oracle used repatriated money to buy Peoplesoft Inc. and reduce its workforce by thousands of employees, while counting the remaining Peoplesoft workers as a net increase in overall employment.

“That is an Orwellian way to show how repatriation increases jobs,” Levin said.

In a statement, Oracle Senior Vice President Ken Glueck didn’t directly address Levin’s comment. He said Oracle has more than doubled its workforce since 2004 and is now “hiring aggressively.”

“The only news in Senator Levin’s results-oriented ‘study’ is that he still opposes repatriation,” said Glueck, whose company is part of the pro-repatriation coalition. “With unemployment over 9 percent and more than $1 trillion waiting to be put to work in the United States, one would have thought he would revisit his long-standing opposition.”

‘One-Sided’ Report

In a statement late yesterday, the WIN America Coalition of multinational companies lobbying for the tax holiday criticized the Levin report as “one-sided” and a recycled “mash-up of old studies.”

The 2004 experience has prompted some lawmakers, including Hagan, to attempt to tie lower rates for repatriated profits to job creation. Under her bill, companies that add jobs would be able to get a tax rate as low as 5.25 percent.

Others, including Democratic Senator Charles Schumer of New York, have expressed openness to a repatriation holiday if any proceeds were used to fund an infrastructure bank.

Senator Orrin Hatch, the top Republican on the Finance Committee, was cool to the idea.

“I’m not very enthused about an infrastructure bank,” Hatch said. The Utah lawmaker said such a proposal would be unlikely to gain much Republican support.

The Obama administration opposes a stand-alone repatriation holiday. The top Republican tax writer in the House, Representative Dave Camp of Michigan, wants to consider the issue as part of a broader overhaul of the tax code.

Stock Buybacks

Along with other studies of the 2004 tax holiday, Levin’s report finds that companies that repatriated the most money accelerated stock buybacks. According to the report, 12 of the top 15 repatriating companies increased stock repurchases from 2004 through 2007.

The Levin study also echoes others that found companies have added to their overseas stockpiles since 2004.

That phenomenon has helped turn a repatriation holiday from a modest tax cut into a much larger one. In 2004, the congressional Joint Committee on Taxation estimated that the government would forgo $3.3 billion in revenue over 10 years.

This year, the nonpartisan committee projected that a repeat of the 2004 tax holiday with a 5.25 percent rate would cost the Treasury $78.7 billion, in part because companies would shift more profits offshore after a holiday and hold them there in anticipation of another round.

--With assistance from Steven Sloan and Kathleen Hunter in Washington. Editors: Jodi Schneider, Bob Drummond

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Andrew Zajac in Washington at azajac@blooomberg.net

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


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