Infrastructure Bill Includes ‘Tax Amnesty’ For Companies With Offshore Cash

As concerns about crumbling roads and bridges mount, one Congressman believes he has an answer. Sen. Michael F. Bennet (D-CO) has introduced a bill, Partnership to Build America Act of 2014 (S. 1957), that would provide for investments and improvements in infrastructure projects. To make it more palatable, funding would not come from a boost in income taxes but from bond sales.

Initially it feels like a win-win for taxpayers. To sweeten the pot, the bill, which creates a new fund, the American Infrastructure Fund (AIF), states, that it will “always make clear that no taxpayer money supports the AIF or ever will support the AIF.”

So far, so good.

But there has to be a catch, right? There is. Under the bill, multinational corporations would be granted the equivalent of a repatriation tax holiday for supporting the AIF. The tax holiday is on top of the return in investment from purchase of a bond (bonds are interest bearing).

Specifically, companies like Google, Apple and Merck, which have parked money offshore for years would be allowed to engage in “aggressively bidding” to buy the bonds. While the actual bidding process hasn’t yet been specified, the general idea is that companies would propose a multiplier for the amount of overseas income they would be allowed to repatriate to the country, income-tax free, in exchange for right to buy the bonds.

Here’s an example. Apple could say, “I’ll repatriate $200 million in offshore profit for every $50 million in bonds that I buy.” Microsoft could offer up $300 million for every $100 million in bonds. And on it goes until the bidding process is over and the “winners” get to buy the bonds. The process has been referred to as a “reverse Dutch auction.”

The idea is to encourage multinational corporations to bring money back to the country rather than have an incentive to park it overseas. And there’s a lot of incentive to keep money overseas. Through a series of sophisticated maneuvers, those dollars aren’t subject to U.S. tax so long as they remain entangled. How much? Apple has at least $40.4 billion in untaxed earnings. It’s been estimated that Apple, Google and a handful of other companies (mostly tech and big pharma) have untaxed offshore profits of more than $1 trillion.

If the money comes back into the country without being subject to tax, the government would lose an enormous stream of anticipated tax revenue. On the other hand, however, the money would be in the country and subject to investment and expenditures here – so, the money would be back in the revenue stream, just not previously taxed. Additionally, part of the money would be tied up as a government investment since the purchase of the bond would be a 50 year commitment.

Response to the bill has been mixed. Earlier this year, the Economic Policy Institute issued a Policy Memorandum (downloads as a pdf) suggesting that “the cost to the government of acquiring the initial $50 billion for the bank would be between about $70 billion and $100 billion in increased deficits and more debt (the bank that the EPI is referring is the AIF, the bond fund).

Despite the concerns about cost, twelve Senators have signed on as co-sponsors. They are:

• Sen. Kelly Ayotte (R-NH)
• Sen. Mark Begich, Mark (D-AK)
• Sen. Roy Blunt (R-MO)
• Sen. Daniel Coats (R-IN)
• Sen. Lindsey Graham (R-SC)
• Sen. John Hoeven (R-ND)
• Sen. Angus S. King, Jr. (I-ME)
• Sen. Mark Steven Kirk (R-IL)
• Sen. Mary L. Landrieu (D-LA)
• Sen. Claire McCaskill (D-MO)
• Sen. Mark R. Warner (D-VA)
• Sen. Roger F. Wicker (R-MS)

The bond plan is, some say, a way to sneak in a repatriation holiday for multinational corporations. Despite clamoring from companies (Apple even retained the lobbying firm of Fierce, Isakowitz and Blalock in Washington, D.C. to reportedly cozy up to Congress) to push through a tax holiday, there’s been reluctance on the Hill to do so – and for good reason. In 2004, then President George W. Bush signed into law a repatriation holiday which allowed multinational companies to bring offshore funds into the United States at a reduced tax rate of just 5.25%, dramatically lower than the 35% statutory rate. It was not considered a success.

The idea, of course, has always been (and remains so under the current proposal) is that taking a revenue hit by foregoing taxes for companies to bring offshore money into the country will pay off in the form of domestic investments. We have this notion that these countries really want to bring funds back to the U.S. to spend and if only they could get a tax break, they would create more jobs and open more domestic facilities. Historically, however, this has not been true. A study by the Center on Budget and Policy Procedures showed that $315 billion in earnings were repatriated under the 2004 holiday but most companies did not use those funds for domestic investment. Companies taking advantage of that holiday included Merck, Hewlett-Packard, Ford, Pepsi and Pfizer. Pfizer repatriated the most money under the 2004 holiday and received criticism for subsequently laying off 3,500 U.S. employees in 2005. Similarly, Ford Motor Company repatriated around $850 million under the holiday and then laid off about 10,000 U.S. workers in 2005; Merck repatriated $15.9 billion and announced layoffs of 7,000 workers in 2005). Other companies which did the same included Motorola, Procter & Gamble, PepsiCo, and Honeywell International.

So what happened to all of that barely-taxed money? A J.P. Morgan Chase survey found that most firms intended to use their repatriated funds for repurchasing stock or paying dividends. Another study found that “[f]irms that valued the tax holiday the most and took greatest advantage of it did not increase domestic investment or employment, but instead returned virtually all of the cash they repatriated to shareholders.”

The uncertainty about the estimated costs versus the perceived benefits has many taxpayers on the fence about the bill – but not everyone. Calling the plan a “form of tax amnesty, pure and simple,” Americans for Tax Fairness (ATF) and the Financial Accountability & Corporate Transparency (FACT) Coalition released a letter (downloads as a pdf) signed by 37 organizations opposing the bill. Engineer

There is some indication that the bill could garner support from President Obama. In the President’s State of the Union speech, he noted “that our tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad.” He went on to suggest that “we can take the money we save with this transition to tax reform to create jobs rebuilding our roads, upgrading our ports, unclogging our commutes – because in today’s global economy, first-class jobs gravitate to first-class infrastructure.” He didn’t specifically reference Partnership to Build America Act of 2014 in the speech but it’s clear now that the bill, which was introduced less than two weeks before the SOTU address, was on his mind.

The bill currently sits in the Senate Committee on Finance. Its sister bill, H.R.2084, Partnership to Build America Act of 2013, sits in the Subcommittee on Water Resources and Environment (having previously been referred to the Subcommittee on Railroads, Pipelines, and Hazardous Materials; the Subcommittee on Highways and Transit; the Subcommittee on Aviation; the Committee on Transportation and Infrastructure; and the Committee on Ways and Means).

Credit: Forbes