Senate Panel Probing '04 Corporate Tax Break

By Lori Montgomery
Washington Post Staff Writer
Tuesday, February 3, 2009

A Senate committee has launched an investigation into potential abuses of a 2004 law that granted a one-time tax holiday to multinational corporations returning foreign earnings to the United States. The probe is intended to dampen enthusiasm for tucking a similar provision into the Senate's $884 billion economic stimulus package.

Sen. Carl M. Levin (D-Mich.), chairman of the Senate permanent subcommittee on investigations, said he has instructed the panel to determine whether companies that took advantage of the tax holiday used the cash to create jobs, as Congress had intended, or used it for other purposes, such as repurchasing their own stock, as one study suggests.

In a joint statement, Levin and Sen. Byron L. Dorgan (D-N.D.) decried a "recent lobbying blitz" aimed at reviving the tax holiday, which reduces the tax rate on repatriated earnings to 5.25 percent from as much as 35 percent.

"The corporate lobbying rush to get this tax benefit into the stimulus bill should raise the hackles of every member of Congress concerned about taxpayers paying their fair share," Levin said in a statement. "I don't think Congress should repeat the 2004 repatriation until we've had a chance to take a close look at what really happened the last time around."

Under U.S. tax law, multinational firms headquartered in the United States are not required to bring home profits earned overseas, creating an incentive to stockpile cash in low-tax jurisdictions such as the Netherlands and the Cayman Islands. As the Senate opens debate on the stimulus measure, Sens. Barbara Boxer (D-Calif.) and John Ensign (R-Nev.) are pressing to include another tax holiday, arguing that it would encourage firms to return as much as $421 billion to the United States. That money, they say, would fatten federal coffers diminished by recession and finance new jobs.

The 2004 measure passed the Senate with 75 votes and is attracting bipartisan support this time around. But it is also coming under fire from liberals such as Levin, who argue that the tax holiday five years ago appears to have enriched a select group of large corporations without benefiting workers.

Last summer, the accounting firm Grant Thornton found that only 843 of 10,000 eligible firms claimed the 2004 deduction, repatriating $312 billion. More than 60 percent of the money came from the Netherlands and other low-tax jurisdictions in Europe, 10 percent came from Bermuda, and 5.5 percent from the Cayman Islands. Manufacturing companies -- primarily drugmakers -- accounted for 80 percent of the claims, according to the Grant Thornton study.

A more recent analysis in January by the nonpartisan Congressional Research Service looked at 12 companies that returned significant sums to the United States. Of those companies, at least eight had cut jobs by 2006. Pfizer, for example, received a significant tax break on $37 billion returned to the United States -- more than double the amount returned by any other company -- but cut 10,000 jobs in 2005, according to the CRS report.

"Empirical analyses of the stimulative effects of the repatriation provisions . . . suggests a limited stimulative impact from the provisions," the report says. "They conclude that much of the repatriated earnings were used for cash-flow purposes and little evidence exists that new investment was spurred."

Meanwhile, the nonpartisan Joint Committee on Taxation estimates that the tax holiday produced an initial flood of cash in 2005, increasing tax collections by $2.8 billion. But because some of that money would have been returned to the United States anyway -- and at a much higher tax rate -- congressional tax analysts predict that the 2004 holiday will cost the government $3.3 billion in lost revenue by 2014.

"Uncle Sam missed out on billions in needed tax revenues," Levin said yesterday. "Such tax holidays not only reduce U.S. tax revenue in the long run, but create new incentives for U.S. multinationals to send more jobs, funds and facilities offshore."

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