California Democratic Senator Barbara Boxer and Kentucky Republican Senator and Presidential contender Rand Paul recently introduced their “Invest in Transportation Act of 2015” that would lower the federal tax to 6.5% on offshore corporate earnings voluntarily returned to the U.S. over the next five years.
While we have long been skeptical of the prospects of any capital repatriation proposals that wasn’t linked to broader corporate tax reform — which is unlikely before 2017, if then — we in fact think this time around the bi-partisan Boxer-Paul bill is more likely than not to be enacted within the next six months.
*** There has been a remarkable surge of political support for the bill across Capitol Hill in the last few days since Congress returned from its Easter recess. The driver to the bill’s sudden momentum is to link the repatriation, which would be voluntary and at a very low tax rate, but with conditions, to the pressing need to find a source of financing to close a funding shortfall to a “must-pass” six year financing of the Highway Trust Fund, whose current short-term funding expires at the end of May. ***
*** There is very little time to debate and pass the Boxer-Paul bill before that end of May deadline, but we think the momentum of political support will translate into a two step process to eventual passage later this year. The first step will be a short-term bill to extend the HTF funding from May to probably at least until the end of the fiscal year in September. That would provide the time for debate and passage of the Boxer-Paul bill in some form that would be an essential part of a longer-term, six year extension of the HTF. ***
*** There remains considerable resistance to a profit repatriation bill, especially one that puts the tax at such a low 6.5% rate. But we now think both the threat of a presidential veto and the reluctance of corporate tax reform advocates, most notably Paul Ryan, the powerful Chairman of the tax-writing House Ways and Means Committee, will be overwhelmed by the political imperative to plug the funding gap in the politically popular Highway Spending Bill. ***
We think the high likelihood of a profit repatriation bill passing this year will be yet another in a string of bi-partisan deals so far this year that will equally raise the probabilities of a FY2016 budget being passed, which we think will lift overall federal spending over the sequester caps of the Budget Control Act of 2011. In addition to the legislation’s direct impact on the economy, including on the dollar, next year, in other words, will bring a modestly better fiscal tailwind to US growth, something the Federal Reserve will only be too happy to see in taking some of the burden off overstretched monetary policy.
Funding the “Must-pass” Highway Bill
The sudden groundswell of political support for the Boxer-Paul deal that we have picked up over these last few days seems driven on two counts. The first is the bi-partisan nature of the bill between the two unusual dance partners, Boxer, the California progressive Democrat and Paul, the Kentucky libertarian Republican who is also running for President in the 2016 election.
Their bill is in fact only the latest in a string of bi-partisan bills coming out of the Congress in the last few months. Indeed, be it the SGR or “doc fix” bill, a likely passage of the Trade Promotion Authority, even the legislation providing for congressional review over an executive agreement with Iran, and in the last few hours, a deal to confirm Attorney General nominee Loretta Lynch, they all reflect what we wrote last year was likely to be a changing political dynamic this year that would favor the centers over the wings of both parties in driving legislation, especially in the Senate (see SGH 9/3/15, “US: Significance of a Narrowed Senate Majority”).
But the primary driver to the political support for the Boxer-Paul bill is quite simply the pressing need to find a ready source of revenue to plug the funding shortfall in the Highway Spending Bill that is considered across Capitol Hill as a must-pass piece of legislation.
The federal government spends some $50 billion or so a year on transportation projects and provides much of the funding for state and local highways and bridges. But the gas/diesel tax only nets around $34 billion per year and it is steadily falling due to fewer miles driven and more fuel-efficient cars and trucks. Since 2008, Congress has plugged the gap with one year “temporary” funding out of general tax revenues, and the current $11 billion “temporary” plug expires May 31.
The present gasoline tax of 18.4 cents per gallon hasn’t been raised since 1993 — and probably won’t be hiked any time soon as there are almost no votes in either the Senate or the House to raise it, even with the recent fall in gasoline prices since the middle of last year.
Thus with this need to find a quick, “no new taxes” source of revenues to finance the hugely politically popular highway spending bill by the time the current fix expires, the tax revenue gained by lowering taxes on corporate earnings is powerfully attractive.
The “Invest in Transportation Act of 2015”
In its current draft, the Boxer-Paul bill would lower the tax paid on profits repatriated from abroad to 6.5% from 39% and would only apply to profits earned in 2015 or earlier and which exceed the company’s average profit repatriations over the previous five years. To win over hesitant Democrats burned by the 2005 profit repatriation legislation that seemed to flow mostly into share buybacks and higher executive compensation, the bill as written includes multiple restrictions on how the repatriated capital can be used.
At least 25% of the profits, for instance, has to be used for new jobs, higher wages or pensions, or research and development that does not supplant already planned research funding. It cannot go towards executive compensation, at least not explicitly, or stock buybacks for at least three years, and any company that “inverts” taxes within ten years of its participation would have to repay the taxes with interest.
The Boxer-Paul bill builds on the earlier work in the House led by Maryland Democrat John Delaney to fund a long term highway bill with a similar capital repatriation scheme. In January, he introduced H.R.625 which would tax the repatriated capital at a 8.75% rate.
But for Congress, both bills share a common objective in that whatever restrictions or a final tax rate that comes out of the legislative process, the revenues gained through the tax on the repatriated profits will be channeled into the Highway Trust Fund to provide a more secure, new source of funding for a planned six year Highway Trust Fund bill.
Because the debate and negotiations over the Boxer-Paul/Delaney bills will take at least several months, our sense is that the plan will be essentially split into two phases. The first will be a very short term extension of the current Highway spending bill beyond its end of May expiration to probably sometime in October.
Yet one more short term bill, however, is likely to garner the necessary votes because it will be seen as the means to the longer term solution as the capital repatriation funding is ironed out over the next few months and included as a key plank of the six year bill.
President Obama has proposed a 14% tax on repatriated overseas profits, which would be permanent and mandatory. But there is no sense on Capitol Hill the White House proposal will see light of day, and no one, Democrat nor much less Republican, are picking up on the President’s proposal, which is essentially Dead on Arrival.
And while the President has threatened to veto any voluntary repatriation at a lower tax rate, it is almost certain he would not veto a bill emerging from the Boxer-Paul proposal that had strong bi-partisan support and was likely to pass in both the Senate and House.
The highest hurdle to using the capital repatriation to fund the highway spending bill is from Ways and Means Committee Chairman Ryan. Ryan has long wanted to keep capital repatriation as an inducement to a broader corporate tax reform, and has feared diverting the repatriation capital to a short term funding fix like the highway bill would cripple the political support for immensely difficult and complicated corporate tax reform.
Corporate tax reform, however, is highly unlikely before 2017, if even then. What’s more, there is a sense that, like Obama, Ryan’s resistance to the plan will steadily give way in the face of the momentum of political support that is likely by the end of the summer.
What’s more, there is some sense that using the tax break for foreign profit repatriation may help rather than hinder broader corporate tax reform, once its time on the agenda arrives, in two years or so.