Latest tax measures for Medicaid would cost multinationals $12.5 billion

Wednesday, August 4, 2010

Spot the tax increase on multinationals

The fierce debate over how to tax U.S. multinationals has found its way into an FAA reauthorization bill that was gutted to become a vehicle for legislation to fund education jobs and state Medicaid programs.

Such is life when you're a giant U.S. corporation and extracting more taxes from you by tweaking the convoluted international tax code has become a go-to method for lawmakers to raise money and pay for programs. In May, Democrats offered nearly identical provisions to pay for the jobs bill, but lawmakers wound up spinning them off into a separate tax extenders bill.

Now the tax extenders are attached to legislation that would give states $26 billion to pay for state health and education programs. The latest tax measures would cost multinationals $12.5 billion, according to Anne N. Mathias at Concept Capital, by limiting the amount of credit a U.S. company can claim for taxes paid to other governments. This would affect tech and pharmaceutical companies with far-flung global operations, such as Intel, IBM, Pfizer and Merck.

The measures are controversial because some Democrats, including President Obama, think that by changing the foreign tax credit system for multinationals, they can limit the number of jobs these companies ship overseas. Others just frown on the extensive tax arbitrage that companies engage in to lower their tax bills.

Of course, this being the Senate, there's been a delay on the state Medicaid bill. Lawmakers balked Monday when the Congressional Budget Office estimated that the bill would add nearly $5 billion to the budget deficit. A vote is expected Wednesday.

Mathias says that stripping the multinationals provision from the extenders bill would only add to pressure for passing an increase in taxes on carried interest -- bad news for partners in private equity and venture capital firms.

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