New study says critics of 2004’s HIA basing their views on wrong assumptions.
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of the popular perceptions about the 2004 Homeland Investment Act was that it really didn’t accomplish much of what it was supposed to. Specifically, it didn’t create jobs and worse, it cost a lot of money. But a new study says the assumptions upon which this perception was based – particularly those of the oft-referenced Congressional Joint Committee on Taxation (JCT) – are incorrect. Further, more recent assumptions on a possible HIA 2.0 are also wrong.
The study, “The Revenue Implications of Temporary Tax Relief for Repatriated Foreign Earnings: An Analysis of the Joint Tax Committee’s Revenue Estimates,” by Robert J. Shapiro and Aparna Mathur for the self-described center-left think tank, NDN, said the JCT based its views on assumptions that aren’t true or are unsupported. For instance, the report takes aim Congress’s JCT estimate that HIA 1.0 would end up costing US taxpayers $3.3bn over 10 years, relative to its baseline which the JCT describes as the current law without the provision. The JCT likewise estimated that if HIA2.0 were enacted in 2011, it would cost US taxpayers $78.7bn over 10 years, compared to its current baseline.
The JCT’s projected revenue losses are based on two assumptions, the study said. One is that a tax holiday would encourage MNCs to “shift the timing of their planned repatriations, so as to bring back funds in 2004-2005 or 2011-2012 which otherwise they would have brought back later at a higher tax.” This would create a spike in tax revenues in the repatriation holiday period followed by a sharp drop in the following years. Mr. Shapiro and Ms. Mathur acknowledge that there is some truth to this assumption, which is backed up by IRS data. However, IRS data also showed that repatriations after 2004 “did not fall below trend as the JCT predicted, but actually accelerated relative to their previous trend.”
The second assumption is that revenue losses predicted by the JCT would be the result of corporates planning around the prospect of a tax holiday. That they would create strategies that would boost profits overseas instead of at home. However there is no evidence that this is the case, the study said.
“JCT has offered no evidence for this assumption, nor have independent analyses found that the expectation of this tax preference altered corporate behavior and structure in this way. High levels of foreign direct investments by US MNCs began at least 15 years before the 2004 Act, in order to build global production networks that could serve global markets. There is no evidence that this process accelerated after the 2004 passage of HIA.”
Ups and downs. There has been much backing-and-forthing over enacting another tax holiday for US corporations. And many observers and decision makers on both sides of the political aisle that have expressed reservations, instead advocating for more comprehensive corporate tax reform. Supporters of a tax holiday also want corporate tax reform, but say that such a large endeavor is either too far off in the future and too late to have any impact on a struggling economy now – or that politicians do not have the political will (read bravery) to enact anything of substance (see related story here).
Nonetheless, the effort keeps gaining advocates. According to the organization Working to Invest Now (WIN) in America (winamerica.org), which includes Apple, Cisco, Google, Pfizer, and more than three dozen other companies as members, supporters come from in all political shapes and sizes. These include President Bill Clinton, House Majority Leader Eric Cantor, former SEIU President Andy Stern, taxpayer advocate Grover Norquist, Congressman John McCain and former Democratic Congressman Harold Ford.
Also, according to news reports, Senator Chuck Schumer, a democrat and member of the Senate Finance Committee, is shopping around the idea of tying a tax-holiday bill to an infrastructure bank that would finance new construction projects in the US.
Unfortunately not counted among those supporters are the Obama Administration and the US Treasury, both of which have put the kibosh on agreeing to an HIA 2.0 anytime soon if ever. Also, a recent Moody’s study showed that cash held overseas was also a check against corporate misbehavior, i.e., spending and acquiring that isn’t in their or their ratings’ interest (see related story here).
But as the economy continues to struggle and amid the prospect of another recession – the infamous double dip – the effort might gain some more supporters.