Senate report says repatriation tax holiday failed to create jobs in US

A key Senate Democrat has released a report calling a corporate tax holiday a failure that should not be reprised, arguing that a previous go-round did not create the number of jobs proponents had promised.

Sen. Carl Levin’s (D-Mich.) report said that, in fact, the corporations who took most advantage of the holiday enacted in 2004 shed jobs in the ensuing years and did not increase their rate of spending on research and development.

{mosads}On the flip side, the study found those corporations also appear to have used the holiday for stock buybacks and to boost executive pay, which was not allowed under the legislation authorizing the holiday.

Levin’s report comes as a group of large corporations, many of them technology firms, are lobbying hard for another crack at a tax holiday, which would give them the opportunity to bring offshore profits to the U.S. at a drastically reduced rate.

“Those who want a new corporate tax break claim it will help rebuild our economy, but the facts are lined up against them,” Levin, the chairman of the Senate’s permanent subcommittee on investigations, said in a statement.

Proponents say that, given the current partisan divide in Washington and with corporations holding roughly $1 trillion abroad, a new holiday is one of the few feasible ways to inject needed capital into the struggling U.S. economy.

Bipartisan groups of lawmakers have now introduced similar bills in the House and the Senate, both of which would allow corporations to get their tax bill on repatriated funds as low as 5.25 percent and also include disincentives for corporations that eliminate jobs. The current top corporate tax rate is 35 percent.

The WIN America Campaign, a pro-repatriation coalition that includes Apple, Cisco, Oracle and Google, released a statement after Levin’s study became available, calling it one-sided and overly reliant on outdated data.

“The real question is, should we allow American companies the freedom to deploy this money here or risk it being spent overseas?” the campaign asked in its statement.

According to Levin’s report, the 15 companies that repatriated the most funds in the previous holiday cut more than 20,000 jobs from 2004 to 2007, even though that was one of the stated reasons for enacting the tax break. Those 15 companies brought back $155 billion, essentially half of the $312 billion that was repatriated during the holiday.

In fact, the subcommittee’s investigation found that only two of 19 corporations – Microsoft and Oracle – who relied heavily on the holiday attributed an injection of spending on new employees to the infusion of offshore profits. (Oracle said it was able to buy two other corporations in part because of the holiday.)

In all, 12 of the 19 corporations reported net jobs losses between 2004 and 2007, with Pfizer, who repatriated more than $35 billion, also cutting 11,748 jobs. For its part, IBM, which brought back $9.5 billion, cut 12,830 jobs.

Like previous studies, Levin’s report also found that corporations who repatriated also gave their top executives big raises and bought back more of their own stock.

In large part, the paper argues, the corporations were able to pull that off, even though those uses weren’t authorized under the 2004 law, because money is fungible and the legislation did not install tough enough oversight measures.

The study found that stock repurchases grew 38 percent from 2005 to 2006 among the top 15 repatriators, and that those companies also increased executive pay by 27 percent from 2004 to 2005 and another 30 percent from 2005 to 2006.

“Increased spending on stock repurchases violated the spirit of the law by directing the stream of repatriated funds to augment shareholder wealth, and likely executive wealth, instead of putting the funds toward Congressional priorities, such as hiring workers or increasing R&D spending,” the report said.

The study also found that, according to the Joint Committee on Taxation, the 2004 holiday lost $3.3 billion over a decade, and that seven of the 19 corporations examined brought back all or the vast majority of their offshore funds from tax havens like the Cayman Islands.

It also said that corporations started stashing an increased amount of profits offshore in the aftermath of the 2004 holiday, with some corporate holiday skeptics saying that the policy encourages multinationals to keep money outside the U.S.

The Levin study adds to a growing library of analysis on repatriation holidays – with left-leaning groups and organizations tilting conservative coming down on each side of the debate.

The Heritage Foundation and Citizens for Tax Justice are among the groups skeptical of another holiday, agreeing that the last one did not do much to spark job creation.

But the U.S. Chamber of Commerce and the Democratic group NDN say that another holiday could help spark economic growth and bring more revenues into the Treasury.