Support wanes for corporate tax "holiday" on foreign profits

Liberal groups are urging key lawmakers to block legislation that would temporarily cut taxes on any foreign profits large American companies bring back into the U.S.

A corporate tax "holiday" on repatriated earnings won't create jobs and will increase the federal deficit, said a coalition of small business, labor and public-interest organizations in a letter on Tuesday to Senate Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky. They added:

The proposed repatriation holiday is, pure and simple, an attempt by a few multinational corporations to dodge their rightful tax obligation. It is a tax avoidance measure that will benefit a few corporations, their executives, and their shareholders, while other taxpayers bear the hefty expense.

In the last major tax holiday in 2004, a total of five companies reaped more than one-quarter of the savings, while 15 firms got more than 50 percent. The biggest beneficiaries of the tax break were pharmaceutical and technology firms.

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Of course, the bigger question is whether the proposal to cut the tax rate on overseas profits from the top statutory corporate rate of 35 percent to 5.25 percent would do what its proponents say it would -- create jobs in the U.S. Again, the last holiday is instructive.

The 15 corporations that reaped the greatest dividends under the "America Jobs Creation Act of 2004" -- including giants such as Altria (MO), Coca-Cola (KO), Hewlett-Packard (HPQ), Johnson & Johnson (JNJ), Pfizer (PFE) and Procter & Gamble (PG) -- brought home a total of $155 billion, according to an October report by Democratic lawmakers (who oppose the tax holiday). Those companies proceeded to reduce their U.S. workforce over the next three years by some 21,000 jobs, while also trimming their domestic R&D spending. The report also found no evidence that the 840 enterprises that repatriated profits following the tax cut went on to increase overall U.S. employment.

What did companies use the tax savings for? Largely repurchasing stock and giving raises to corporate executives, it appears. The top 15 repatriating corporations increased their stock buybacks by more than 50 percent in the two years following the tax cut, the Senate permanent subcommittee on investigations found. Annual compensation for corporate leaders at these companies jumped roughly 57 percent over that period, with many of the top execs receiving bonuses of at least $1 million.

Another reason to question the value of giving multinational corporations what amount to massive tax giveaways on foreign profits: It encourages companies to funnel earnings abroad, often using dubious tax schemes, in expectation of a future holiday. After all, if corporate leaders know that every few years Congress is likely to slash their taxes on overseas earnings, then they'd be foolish not to keep that money tucked safely away in some offshore tax haven. The figures bear that out. A year before the 2004 holiday, U.S. companies had $229 billion in untaxed offshore profits, according to another study. By 2010, that figure had more than tripled, to $696 billion.

Opponents of a corporate tax holiday have reason for cheer, however. Although Republican lawmakers have pushed to include a corporate tax holiday as part of a broader deal with congressional Democrats to extend cuts in payroll and unemployment taxes by year-end, GOP support is wavering. Reports the WSJ:

"I'm for repatriation, but we ought to hold off on repatriation" until a broader corporate overhaul passes, Sen. Orrin Hatch (R., Utah), the top Republican on the Senate Finance Committee, told reporters on Tuesday. "It doesn't belong in this debate."

Certainly not heading into an election year, with accusations of political pandering to deep-pocketed contributors certain to be flying around. But when the coast is clear on Capitol Hill, the intense corporate pressure for another holiday is equally sure to revive that debate.