Wonkbook: Burger King and Tim Hortons, with a side of tax reform

Welcome to Wonkbook, Wonkblog’s morning policy news primer by Puneet Kollipara (@pkollipara). To subscribe by e-mail, click here. Send comments, criticism or ideas to Wonkbook at Washpost dot com. To read more by the Wonkblog team, click here. Follow us on Twitter and Facebook.

Wonkbook’s Number of the Day: 2,000. That's the value that the S&P 500 managed to eclipse today (but not close at) for the first time in its history.

Wonkbook’s Chart of the Day: These charts show new survey findings suggesting that most people don't think police forces do well at treating races equally.

Wonkbook's Top 5 Stories: (1) A tax inversion that may serve as a king-sized policy debate spark; (2) Napa quake's policy and economic impact; (3) VA care fixes on the way; and (4) more unexpected dilemmas for legal marijuana.

1. Top story: Burger King wants to move its headquarters to Canada. Will there be a side of tax reform with that?

Burger King announces deal to buy Tim Hortons. "International fast food behemoth Burger King Worldwide Inc. confirmed Tuesday that it will pay about $11 billion to buy Canadian chain Tim Hortons Inc., which sells coffee, donuts, and other breakfast food fare. The deal would merge America's second-largest burger chain, which is valued at nearly $10 billion, with the Canadian equivalent to Dunkin' Donuts, which is valued at more than $8 billion. It would also move the new company's headquarters to Canada, where corporate taxes are significantly lower. 'The newly merged company would become the world's third-biggest 'quick service restaurant company,' with more than 18,000 restaurants in 100 countries, said Burger King and Hortons in a statement Monday..."

Why Burger King may want to incorporate abroad. "When a company reincorporates abroad, as the practice is known, what it's really doing is shifting its corporate citizenship; and when a company shifts its corporate citizenship, what it's really doing is trying to pay less in taxes. The effective corporate tax rate in the U.S., which combines national, state, and city-level tax rates, is nearly 40 percent—the highest across all 34 Organization for Economic Cooperation and Development (OECD) member countries. Canada's, by comparison, is just over 26 percent." Roberto A. Ferdman in The Washington Post.

Background reading: As U.S. firms move to reincorporate in Europe, can Washington get its act together on tax reform? "The most immediate problem is the Nov. 4 congressional election. Instead of focusing on tax reform, Democrats are focusing on the great campaign ads they might be able to run against Republicans who vote against legislation to target inversions....But there are substantial policy problems, as well. Start with this: For years, Republicans have insisted that an overhaul of the corporate tax code must move through Congress in tandem with a rewrite of the tax code for individuals....As with corporate tax reform, the primary goal of Republicans is to lower the top individual tax rate, which now stands at 39.6 percent." Lori Montgomery in The Washington Post.

Our previous coverage: What you need to know about Obama’s possible inversion intervention. Puneet Kollipara in The Washington Post.

Can Treasury's inversion action hold up in court? "Any rule, guidance, or proposal is going to be poured over by tax attorneys, accountants, hedge funds and others, and Treasury has a number of considerations to keep in mind. First, will it have the intended effect?...And there’s also a good chance that Treasury could face a lawsuit (or two) based on its plan, and the process could end up in court. If Treasury tries to address inversions and a court decides the administration’s plan is legally flimsy, the White House could inadvertently end up giving a legal 'green light' to companies pursuing inversions in the future. If Treasury moves forward with a policy that stands up in court, it could reshape future mergers for years in a way that many...didn’t think possible." Damian Paletta in The Wall Street Journal.

Related: Treasury's tax man will handle the department's inversion push. Damian Paletta in The Wall Street Journal.

Surprise! Warren Buffett's firm to help finance deal. "Mr. Buffett's Berkshire Hathaway Inc. would invest in the deal in the form of preferred shares, some of the people said. Berkshire is expected to provide about 25% of the deal's financing, one of the people said. The exact structure of Mr. Buffett's participation remains unclear and the discussions are ongoing....The investment would also thrust Mr. Buffett, known for championing American companies like Coca-Cola Co. and for advocating that wealthy individuals pay their fair share of taxes, into an uncomfortable position at the center of a spirited debate over U.S. tax policy." Dana Mattioli, David Benoit and Julie Jargon in The Wall Street Journal.

Tax dodge by Bain escapes scrutiny on inversions. "Sensata didn’t become Dutch by using the strategy known as 'inversion.'...Sensata is one of at least 14 firms that have left the U.S. tax system through a sale to an investment fund....Although these companies have a combined market value of about $75 billion, this tax-avoidance strategy has gotten less attention in Washington than inversions and may be harder to discourage. These buyouts mean profits for the U.S. private equity firms like Boston-based Bain Capital LLC that orchestrated them. Bain earned more than $3 billion after it took Sensata public as a Dutch company in 2010, with an effective tax rate about one-tenth of some competing manufacturers." Zachary R. Mider in Bloomberg.

Separately, the Ex-Im Bank battle is a wild card in key Senate races. "In an election cycle where no single issue is animating voters, the relatively obscure lender, which provides loans and loan guarantees to foreign buyers of American products, has become an unlikely source of prominent campaign friction. The fight over whether to reauthorize the bank, which Congress must do by the end of September to sustain its operations, has roiled Capitol Hill in unexpected ways, creating a divide between the Tea Party movement and establishment Republicans. It also is providing an avenue for Democrats to showcase their support for American companies and to try to drive a wedge between business interests and Republican candidates." Carl Hulse in The New York Times.

Factories keep losing ground to global rivals. "America's shale boom has raised hopes of a revival in U.S. manufacturing, in part fueled by cheaper energy. But U.S. factories still are losing ground to rivals in Asia and Europe....The U.S. deficit on trade in goods swelled in the first half to $371.59 billion from $354.64 a year earlier. Imports rose 3.3%, while exports increased 2.6%....Without a strong, sustainable increase in exports, U.S. factories are unlikely to have the kind of resurgence forecast by some pundits. But achieving that growth is difficult as China and other countries have pursued aggressive export strategies and the U.S. has lost manufacturing skills and suppliers after shifting production overseas." James R. Hagerty, John W. Miller and Bob Tita in The Wall Street Journal.

Other economic/financial reads:

New home sales fall, but U.S. economy stays on solid ground. Lucia Mutikani in Reuters.

U.S. bank liquidity rule said to exclude municipal bonds. Jesse Hamilton and William Selway in Bloomberg.

FEYMAN: No, inversion is not unpatriotic. Yes, we need tax reform. "Simply put, a worldwide tax system puts American firms at a significant competitive disadvantage....There’s nothing 'unpatriotic' about cutting costs to running your business. Restructuring to reduce tax burdens is no more than unpatriotic than corporations incorporating in Delaware to take advantage of the simple incorporation process. More importantly, the idea that companies aren’t 'paying their fair share' — at least relative to companies in other countries — is equally disingenuous." Yevgeniy Feyman in Forbes.

HEALEY: The spreading inversion virus. "There's some evidence that some companies in the pharmaceutical industry, which has been the biggest user of corporate inversions, have been daunted by Obama's harsh comments about the practice. But the move by BK confirms that the maneuver is spreading to more corners of the business world as the administration and Congress look for ways to stop it." Jon Healey in the Los Angeles Times.

LEVINE: This inversion isn't very inverted at all. "Tim Hortons is actually bigger than Burger King, on revenue and net income though not on stock market capitalization. This is not just an aesthetic point. In the uproar about inversions, several bills have been proposed in Congress to stop them....Each tries to stop U.S. companies from relocating abroad by means of a merger with a foreign company in which the U.S. company's shareholders end up with more than 50 percent of the shares. (Versus the current legal standard of 80 percent: As long as Tim Hortons shareholders end up with at least 20 percent of the combined company's shares, it's a valid inversion under current law.)...If you want to use this deal as an example of why the inversion rules should be changed, be careful." Matt Levine in Bloomberg View.

Top opinion

SUNSTEIN: Who cares what economists say about immigration? "Economists disagree about a lot of things, but on behalf of immigration reform, there is a professional consensus that cuts across the usual political divisions. Why, then, has reform stalled in Congress? Obama's strategy assumed that people care what economists think. And in many contexts, they do. On largely technical issues...Americans pay attention to the consensus within the economics profession....But on issues with heavy symbolic dimensions, where emotions tend to run high, economists have far less influence, even if they speak with one voice." Cass R. Sunstein in Bloomberg View.

BERNSTEIN: Cutting the corporate tax would make other problems grow. "The abolitionists ask: Why not give up on the fiction that we can adequately and efficiently tax companies and instead tax their shareholders at higher income-tax rates? But as imperfect as the corporate tax may be, the end of it would create all kinds of problems and disadvantages....The corporate tax is an important balancing mechanism in an era of great inequality....Another reason abolishment is a bad idea: If you think we’ve got tax avoidance problems now — and if you don’t, you’re not paying attention — we’d have a much bigger problem with a zero tax rate on incorporated businesses." Jared Bernstein in The New York Times.

LIFTON: The climate swerve. "This sense of the climate threat is represented in public opinion polls and attitude studies. A recent Yale survey, for instance, concluded that 'Americans’ certainty that the earth is warming has increased over the past three years,' and 'those who think global warming is not happening have become substantially less sure of their position.' Falsification and denial, while still all too extensive, have come to require more defensive psychic energy and political chicanery. But polls don’t fully capture the complex collective process occurring." Robert Jay Lifton in The New York Times.

GABLE: One Colorado program did not significantly cut the state's teen pregnancy rate. "This all overstates the program’s success and influence and ignores the fact that much of these effects probably would have happened anyway. There were big decreases in both teen abortions and births in the Colorado countries benefiting from the program during its duration — but to say the program directly caused the huge decreases is a simplification that overstates the complicated relationship between contraception, abortions, and births. Why? The teen abortion rate had been falling dramatically for a significant period of time, and with CFPI, it just kept falling." Callie Gable in National Review.

CROVITZ: More regulation doesn't always mean more safety. "Every month lost to regulatory gridlock causes real harm. Human error causes more than 90% of car accidents, leading to more than 30,000 deaths in the U.S. annually. The economic cost of accidents is more than $200 billion a year, representing more than 2% of GDP. Self-driving cars will create more safety than the regulatory approach based on the Ralph Nader critiques of the 1960s, which were flawed by the conceit that more regulation meant more safety." L. Gordon Crovitz in The Wall Street Journal.

LITAN: Where the jobs are coming from and why it matters to the Fed. "While it’s good news that more jobs are being created, the fact that they are increasingly coming from more established firms supports the finding of an earlier study Ian and I published showing that the firm structure of the U.S. economy is aging....The data on where jobs are coming are thus consistent with official government forecasters’ current moderate pessimism about the long-run prospects for U.S. economic growth in the future. This means that once the Fed has judged that the slack in labor market has been used up, it will have to be more vigilant to prevent future outbreaks of inflation than it would if the U.S. economy were more dynamic." Robert Litan in The Wall Street Journal.

JOHNSON: To end population growth, lift mothers out of poverty. "Wannabe Loraxes like me try to speak for the trees, which often means pushing back against the demands of humans. But in this case (unless you propose a truly evil route), what’s good for turtles, trees, and the larger ecological commonwealth is also what’s good for the poorest of our own species. If we want to solve this population problem, we need to become humanitarians.." Nathanael Johnson in The Atlantic CityLab.

Emmy interlude: The Kid Emmys.

2. The economic and policy fallout of the Napa Valley quake

Costs to the tourist industry could rise to $4 billion. "Insurers will probably cover about $2.1 billion, according to an estimate from Kinetic Analysis Corp....Costs borne by the industry may be limited because many homeowners don’t have earthquake coverage, according to the Insurance Information Institute....Catastrophe-modeler Eqecat estimated there would be $1 billion of insured losses, with as much as half that figure coming from residential claims. The cost for the industry could climb because of coverage that protects commercial policyholders from lost revenue, Eqecat said. Such losses have fueled higher-than-expected claims from other recent catastrophes including superstorm Sandy in 2012." Michael B. Marois, Zachary Tracer and Dan Hart in Bloomberg.

Earthquakes cost more in rich countries, but devastate poor ones. "Earthquakes are more expensive in rich areas because there’s more to break.....While there’s more to break in wealthy countries, construction is far better — buildings have to meet earthquake-safety regulations, for example. In poor countries, a greater proportion of the existing infrastructure collapses in a quake....Related to the greater risk of infrastructure collapse, quakes are yet another deadly condition that disproportionately impact the poor....Don’t let the damage estimates fool you: To survive an earthquake with most of your loved ones and resources intact, it is far better to be in Napa Valley than Nicaragua or Haiti." Charles Kenny in Bloomberg Businessweek.

Explainer: Taking the measure of an earthquake. Evan Horowitz in The Boston Globe.

Why the earthquake probably won't make your next bottle of wine more expensive. "Napa Valley is more important to the history of winemaking than to actual wine production. Less than 4 percent of the wine produced in this country comes from Napa. Roughly nine-tenths of U.S. wine comes from California, but most of those grapes are grown in the state's Central Valley, which was not affected by the earthquake. Most wine enthusiasts won't have trouble finding their favorites — except for those who insist on Napa bottles. Those wineries that did lose barrels might raise prices on what they have left....Grapes from Napa already trade at a premium." Max Ehrenfreund in The Washington Post.

A picture doesn't tell the story when it comes to the damages. "As winemakers and tourism officials began cleaning up and assessing the damage, there was evidence that the impact may not have been as widespread as suggested by the images that flooded Twitter and television screens. As is often the case with earthquakes, the amount of shaking — and thus damage — can vary significantly within a few square miles. This was certainly true here in wine country, where there were drastically different, and sometimes conflicting, reports of damage from vineyard to vineyard on Monday." Conor Dougherty, Ian Lovett and Adam Nagourney in The New York Times.

Why 8 of 9 Californians don't have earthquake insurance. "When it comes to rebuilding, much of the cost will come out of people’s own pockets. The percentage of homeowners with earthquake insurance in California and across the U.S. has declined, despite rising estimates of the risk of an earthquake....But as fewer people opt for earthquake insurance, the government is upping its assessment of the risk of a sizable shake....So why are people buying less earthquake coverage when estimates of risk are growing? Unlike tornadoes, hurricanes, and wildfires, which are typically covered under home insurance policies, earthquake insurance is purchased separately and often comes with a high deductible, in addition to premiums." Alyssa Abkowitz in Bloomberg Businessweek.

All this is happening as California deals with drought. "The earthquake came as the Napa-Sonoma area has been forced to speed up the grape harvest amid a worsening drought that has gripped the state for three years. The harvest under way now is usually in September, traditionally the industry’s busiest time and a peak period for visitors....U.S. Agriculture Secretary Tom Vilsack said today in Arlington, Virginia, that it was too early to make any disaster declaration that would give affected wine growers eligibility for special loans and disaster assistance." Michael B. Marois and Alison Vekshin in Bloomberg.

Quake boosts calls for early-warning systems. "In the coming years, Californians could have valuable seconds of warning before earthquakes such as this week's wine country temblor reach them....Earthquake early warning systems that provide such notice are in place in Mexico and Japan. But California has lagged behind those countries, and is still trying to identify funding sources for the roughly $80 million needed to implement an early-warning system in the state. Sunday's rolling 6.0 shake near Napa has led to renewed calls for its quick deployment before another, possibly more destructive temblor strikes. Researchers are testing a system that could provide tens of seconds of warning, but it is not available for public use." Sudhin Thanawala in the Associated Press.

System under testing gives 10-second warning. "Ten seconds before the earth rumbled in a UC Berkeley lab early Sunday morning, an alarm started blaring — and an ominous countdown warned that a temblor centered near Napa was moments away. 'Earthquake! Earthquake!' it cautioned, after a quick series of alarms. 'Light shaking expected in three seconds.' The successful alert was the biggest test yet in the Bay Area for a type of earthquake early-warning system that's not yet available to the public in the U.S. but already is providing precious seconds of notice before quakes hit in Mexico and Japan." Katy Murphy in the San Jose Mercury News.

Dog days of summer interlude: Dog blows bubbles underwater.

3. Changes are coming to the VA care system

Watchdog finds no evidence that delays in care caused deaths at hospital. "The Department of Veterans Affairs says investigators have found no proof that delays in care caused any deaths at a VA hospital in Phoenix, deflating an explosive allegation that helped expose a troubled health care system in which veterans waited months for appointments while employees falsified records to cover up the delays....The inspector general's final report has not yet been issued....Deputy VA Secretary Sloan Gibson confirmed the findings in an interview with The Associated Press. Gibson, however, stressed that veterans are still waiting too long for care, an issue the agency is working to fix." Stephen Ohlemacher in the Associated Press.

The VA is preparing a whole host of fixes for its troubled care system. "Outside experts in ethics will be hired to recommend how to 'select and hire ethical leadership and staff (and) how to communicate expectations around ethical behavior.' Across the entire VA system, $400 million must be spent on staff overtime or private doctors to ensure veterans are treated quickly....8,248 VA schedulers across the country have been trained in appropriate ways of scheduling patients....An internal investigation board will be created to identify managers at the Phoenix hospital responsible for wrongdoing....Nearly $17 million has been spent in Phoenix to send veterans to private doctors....Mental health resources have been expanded in Phoenix." Gregg Zoroya in USA Today.

VA also seeks to replace its much-maligned scheduling system. "The Department of Veterans Affairs said Monday it is poised to solicit bids from companies who can offer a 'cutting-edge' replacement for the agency's 'antiquated' appointment scheduling system....The VA will issue by the end of next month a draft request for proposals for a new medical appointment scheduling system that utilizes 'cutting-edge, management-based scheduling software.' Vendors will have 30 days to respond. The initial solicitation will be followed by a second 'full RFP' to ensure input from would-be contractors and other interested parties." Benjamin Goad in The Hill.

Other health care reads:

WHO seeks $430 million for the fight against Ebola. Simeon Bennett in Bloomberg.

Could a wording glitch doom the health law? David G. Savage in the Los Angeles Times.

New birth control rules appear to track Supreme Court suggestion. Julie Rovner in Kaiser Health News.

The end of tanning? Olga Khazan in The Atlantic.

Demanding animal interlude: Cat demands more petting from its human servant.

4.  The legal challenges to legal marijuana

Colorado judge will not strike down 'self-incriminating' marijuana taxes. "A Colorado judge ruled Friday that consumers and sellers of recreational pot must continue to pay taxes, even if it puts them at risk of federal prosecution. A group of marijuana activists had filed a lawsuit against the state, claiming that pot taxes violated consumers’ and businesses’ Fifth Amendment rights against self-incrimination. The activists’ attorney, Rob Corry, warned that those who pay the taxes are essentially acknowledging that they have violated federal law." Sarah Ferris in The Washington Post.

Medical marijuana faces federal legal hurdles. "For years, the five Stanley brothers, who sell a nonintoxicating strain of cannabis that has gained national attention as a treatment for epilepsy, have grown medical marijuana in greenhouses, under tight state and federal regulations. But this year, they are not only growing marijuana outdoors by the acre, they also plan to ship an oil extracted from their plants to other states. The plan would seem to defy a federal prohibition on the sale of marijuana products across state lines. But the Stanleys have justified it with a simple semantic swap: They now call their crop industrial hemp, based on its low levels of THC, the psychoactive ingredient in pot." Dave Philipps in The New York Times.

Is medical marijuana the answer to America’s prescription painkiller epidemic? "States with medical marijuana laws on the books saw 24.8 percent fewer deaths from painkiller overdoses compared to states that didn't have such laws, according to the study....The study isn't exactly a slam dunk for medical marijuana advocates, though. The authors say they can't make a direct causal link between state medical marijuana laws and lower painkiller overdose rates. There are other limitations to the study....Further, medical marijuana laws differ across the states, and implementation is usually the result of a messy and highly political process, making it difficult to measure the over all effects of those laws." Jason Millman in The Washington Post.

Meanwhile, the debate over whether e-cigarettes promote tobacco use just got messier. "The Centers for Disease Control and Prevention released a new study showing that adolescents who vape say they are much more likely to smoke conventional cigarettes....While there is no doubt that smoking tobacco is one of the worst things you can do for your health, there is debate about whether e-cigarettes promote cigarette use or can help prevent it by offering people access to nicotine-laced vapor without the harmful chemicals in tobacco smoke. Others claim that e-cigaretttes may help wean smokers off tobacco, for the same reason. In April, the Food and Drug Administration announced plans to regulate e-cigarettes for the first time since they came to the United States in 2006." Lenny Bernstein in The Washington Post.

Leading heart group weighs in, says they may be worth it, but only to try to stop smoking. "The American Heart Association...said physicians shouldn’t discourage e-cigarette use as a last resort to drop a smoking habit....The heart association said e-cigarette use should be supported as a quitting mechanism only if smokers are intolerant of, fail at, or refuse other options. 'However, subjects should be informed that although e-cigarette aerosol is likely to be much less toxic than cigarette smoking, the products are unregulated, may contain low levels of toxic chemicals, and have not been proven as cessation devices,' according to the heart group’s policy statement." Anna Edney in Bloomberg.

Animals dancing interlude: Watch these elephants dance to violin music.

Wonkblog roundup

Why the Napa Valley earthquake is unlikely to affect wine prices. Max Ehrenfreund.

Is medical marijuana the answer to America’s prescription painkiller epidemic? Jason Millman.

Existing home sales are up, but new home sales are down. What’s going on? Dina ElBoghdady.

Have taxes your way: Why Burger King wants to become a Canadian citizen. Roberto A. Ferdman.

Three quarters of whites don’t have any non-white friends. Christopher Ingraham.

Not just the Heartland: Where there’s a shortage of young people. Jeff Guo.

Central banks to lawmakers: You try growing the economy. Ylan Q. Mui.

Name That Data winners, week six. Christopher Ingraham.

Et Cetera

The surveillance engine: How the NSA built its own secret Google. Ryan Gallagher in The Intercept.

College cops score surplus defense supplies. Allie Grasgreen in Politico.

ACLU, media sue Oklahoma for more access to executions. Mark Berman in The Washington Post.

In search of libertarians. Jocelyn Kiley in Pew Research Center.

Students aren't getting enough sleep — school starts too early. Jessica Lahey in The Atlantic.

No wrongdoing in social cost of carbon, watchdog says. Zack Colman in the Washington Examiner.

California governor signs cellphone kill-switch bill into law. Brian X. Chen in The New York Times.

Got tips, additions, or comments? E-mail us.

Wonkbook is produced with help from Michelle Williams and Ryan McCarthy.

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Roberto A. Ferdman · August 26, 2014