We've written here before about the enormous amount of cash that is sitting idle overseas, because the companies involved don't want to pay the stiff tax bill that would result from repatriation. Most of the large corporations with sizeable international divisions - Microsoft, Pfizer, Oracle, Apple, Cisco, and the like - have enormous amounts stashed outside the country. They've been lobbying Congress hard to give them a tax holiday during which they could bring the money home untaxed, or taxed at a reduced rate.
On the face of it, it seems to make a lot of sense. All of those dollars are doing little if anything to revitalize the domestic economy, and the companies involved have been arguing that they could help kick-start things if they were reinvested here.
The pushback has been strong, however. The Obama administration, along with most Democrats, are very sensitive to the record profits some companies have been posting in the midst of a recession. They don't want to be seen as giving some high flyers a tax break that is going to be painted as a giveaway among their base supporters. Plus, they fear that a move like this will just encourage companies to restock their overseas coffers as they await the next holiday.
However, the logjam on this issue may just have been broken. Last week, the bipartisan Senate duo of John McCain (R-AZ) and Kay Hagan (D-NC) joined forces to co-sponsor a new bill called the Foreign Earnings Reinvestment Act of 2011. It would temporarily tax earnings generated internationally at rate of 8.75%, as opposed to the present liability, which runs as high as 35%.
Sen. Hagan estimates that "a trillion dollars is locked out overseas. This is truly an opportunity to inject that into this anemic recovery." McCain added that the bill projects to pump between $50 billion and $80 billion of tax revenue into the US Treasury, while spawning two million new jobs.
Their bill is not the first shot fired at this issue. In fact, there have been four other tries by members of Congress to get repatriation legislation passed. But this one might just have the best chance.
Objections cited against the other such bills reference a similar 2004 tax holiday, championed by President Bush, that produced little job creation. Most of the money was paid out as dividends and bonuses or used to buy back stock. The McCain-Hagan bill addresses some of the perceived deficiencies of the 2004 plan, offering additional incentives for companies to create new employment opportunities, while imposing penalties on those which repatriate earnings but slash jobs. If businesses add to their employee base, increasing "qualified payroll" by 10% or more, they can cut their taxes on foreign earnings even further, to 5.25%. But if they merely pocket the money while their payrolls shrink, their gross income for tax purposes is increased by $75,000 per job loss.
Five other senators - one Democrat and four Republicans - immediately signed on to the plan.
It would likely be a popular bill in the House, but prospects of getting it through the Senate remain daunting. Majority leader Harry Reid has said it can't be passed as a stand-alone, although it might succeed in conjunction with other measures that Republicans would probably oppose, such as new infrastructure investment. (New York Sen. Chuck Schumer said back in June that Democrats might be open to using the short-term revenue provided by a corporate tax holiday to finance an infrastructure bank.) For its part, the Obama administration has said it will consider changing the tax treatment of foreign earnings only if it's tied to much more comprehensive corporate tax reform.
In an attempt to blunt opposition, McCain said the bill would be offered as an amendment to President Obama's jobs package when that measure arrives in the Senate, if Democratic Senate leadership does not on its own include the tax provision in the package.
While the McCain-Hagan bill faces a rocky road, the growing bipartisan consensus for repatriation likely means some variety of tax holiday will be enacted, perhaps before the year is out.
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