Faced with the reality that comprehensive tax reform will not happen this year, key lawmakers are pinning their hopes on a one-time tax repatriation holiday on U.S corporate overseas earnings.
According to the New York Times, Senate Majority Leader Harry Reid (D-NV) has joined with Sen. Rand Paul (R-KY) to discuss such a plan in order to replenish the depleting Highway Trust Fund. Their proposal could gain momentum as the Senate moves forward on a transportation spending bill. If approved, as much as $2 trillion could return from abroad—giving treasury and finance executives more cash to deploy.
Senate Finance Committee Chairman Ron Wyden (D-OR) is tasked with addressing both comprehensive tax reform and finding a funding source for the $265 billion bill for transportation and infrastructure spending. With the Highway Trust Fund on the verge of insolvency and a budget requirement stipulating that allocated revenue must be offset, Reid is pressing for immediate funding needs. .
Ranking Republican on the Senate Finance Committee, Senator Orrin Hatch (R-UT), has shared Wyden’s expressed intent not to steer away from a permanent fix to the tax code. Continuing down that path, the committee announced that it will hold a series of tax hearings, one of which in July will address “modernizing corporate taxation.” Wyden has said he also would like to finalize the transportation funding bill by July.
When asked by reporters about ongoing repatriation discussion, Wyden left the option on the table. “Nothing has been agreed to, nothing has been ruled out, nothing has been ruled in,” he said.
On Tuesday, Sen. Paul confirmed to CNBC that he has been informally meeting Senator Reid to carve out a tax holiday provision they say would pay for the $16 billion needed to avoid a bankruptcy of the Highway Trust Fund. “If you do it over about a three-year period,” said Paul, “we think it could bring as much as $50 billion to $60 billion,” in generated tax revenue.
Paul suggested he would like to see a five percent tax rate on the nearly $2 trillion in overseas corporate earnings, while insisting any final compromise keep below ten percent.
Senate Minority Leader Mitch McConnell (R-KY) acknowledged that a tax holiday was being discussed within the Republican caucus. “It enjoys a good deal of support in our conference,” he told reporters.
Report casts doubt on repatriation’s effectiveness
Repatriation talks come days after the Joint Committee on Taxation (JCT)—a congressional nonpartisan research committee—reported that existing data suggests a temporary tax repatriation period would bring in $20 billion in its initial two years, but over the following eight years would cost $115 billion—amounting to a revenue loss of $96 billion over 10 years.
In a statement, Senator Hatch, a known supporter of business tax relief, maintained his preference toward achieving corporate tax reform through comprehensive legislation. Responding to the JCT letter, Hatch said a temporary tax holiday would not be “in the best interest of the American people nor for the coffers of the federal government.”
The JCT’s findings were based on data accumulated from the previous repatriation holiday of 2004-2006. During that period U.S. companies were permitted to return foreign profits at a 5.25 percent rate, in which a total of $362 billion was repatriated.
Using data from the 2004 tax holiday, the JCT determined that in subsequent years after a holiday, companies would repatriate less income than without the holiday altogether. Moreover, in what the report calls a “moral hazard problem,” continuous implementation of temporary tax relief will incentivize companies to withhold from repatriation until future anticipated holidays.
The report suggests, in fact, that without temporary relief periods, companies actually are likely to increase income repatriation down the road as implicit costs of deferment rise with the overall growth of permanently reinvested earnings.
Follow Konstantine Kastens, AFP Public Policy Analyst, on Twitter: @KastensAFP